26 January 2016

Revenue problem #nlpoli

Jon Parsons  has an interesting take on the provincial government's financial mess.  It’s worth taking a few minutes to go through it.  Follow some of the links he offers as well.  Altogether they form what you might call a different perspective on things:
 The current deficit and debt…are the result of decisions that were made by a small number of people, and also because of the whims of the global trade in oil.
The key element of Parsons’ argument is that we are not dealing with a spending problem but a revenue problem.  We don’t bring in enough money largely because local elites have given away gigantic benefits to the local rich and to multi-national corporations.

The idea we have a revenue problem isn’t new and it certainly isn’t unconventional.  The province’s three political parties and the public sector unions all basically say the same thing or have made the same claim over the past year.

One of the links Parsons gives is to a piece last year by fellow Indy columnist Tom Baird on the impact of tax cuts over the past decade.  Based on information provided by the provincial finance department, Baird notes that those cuts removed about $744 million from provincial coffers.

Baird makes the fairly obvious suggestion that if the government lowered taxes when times were good, it should raise taxes now that times are bad.  Makes sense on the face of it.

But look at the finance department document.  The single biggest item is the cut to personal income tax made in 2007. It accounts for $567 million of the total and that total is supposedly the value of all the cuts in any one year.

That’s not bad for something that was only supposed to produce an annual reduction in taxes of about $160 million.  Yeah, you see the $744 figure appears to be a cumulative amount added up not just within a single year but over the course of all the years since each measure started.

There was always something a bit fishy about the idea that a cut in a couple of percentage points in each tax bracket would cost the treasure almost half its total haul in 2015.  But even if that was an annual total, let’s just snap out fingers for a second and reverse every single tax cut on that list.  We’d still only have less than $750 million when the current cash deficit is something on the order of four times that much money.

So revenue problem?

Not really.  All the fats cats are not making out like bandits on those tax cuts and the expense of the little guy.. Just for the fun of it go back and look at the cuts that weren’t the personal income tax.  A lot of them are aimed at people on low and fixed incomes.  And the cumulative total isn’t all that great. 

Plus you have to consider that the personal tax cuts themselves applied across all brackets and amounted to a couple of points in each one. The creation of new tax bracket for higher income earners in 2015 didn’t produce a great deal of cash,  as Baird noted.  The reason is pretty simple:  there are just not a lot of people in the province making incomes high enough to qualify for the highest tax.  About two thirds of tax filers are in the lower end of the income spectrum.

But what about oil you say?

Well, yes.  Oil has dropped quite dramatically.  You can find that in a recent access to to information request.  $551 million this year and about $738 million next year. Less than $1.2 million over the next four years. Over the balance of the next decade, the finance department estimated royalties from oil to be less than $1.5 billion in all but one year.

Oil prices are likely to go up and down.  Historically, they have done that.  That’s why the provincial generic royalty regime – the one that’s been there since 1997 – was designed to work well for the folks that own the resource regardless of price.  It also was supposed to make the provincial offshore globally competitive in an industry that needs a lot of capital that the provincial government doesn’t have.

Generally it does, splitting the total cash from the fields almost half and half between the owners – you and me – and the companies who develop the fields.  The problem for taxpayers is that the provincial government decided to spend all of oil revenue and then some.  By definition, that’s pretty silly given that oil revenues are not particularly reliable.

The result is that when oil prices fall – as they inevitably and unpredictably will – the government is caught spending more than it is bringing in.  While the government can bring in some additional revenue by changes to taxes,  the total is rather modest.  We’ll take a look in another post at the mineral royalties, another point Parsons makes.

But seriously, a revenue problem?

Newfoundland and Labrador will bring in this year more revenue per capita than Israel, Greece and Spain and in recent years, it has been bringing in as much per capita as the United Kingdom and the United States. (OECD)

Djibouti has a revenue problem.

Newfoundland and Labrador’s problem is something else.