04 January 2016

The Bridge to Ottawa #nlpoli

Premier Dwight Ball said everything is on the table to deal with the massive financial problem facing his administration.

And then, in a string of year-end interviews,  Ball immediately took everything off the table.

No cuts to spending as that would slow the economy.  Ditto for tax increases.  Even “efficiency” went out as Ball told the Telegram’s James McLeod that you couldn’t deliver existing services without the existing staffing levels.

Ball told NTV’s Mike Connors that we “need to find a way to bridge us [from] where we are currently until the commodities rebound and be [sic] the significant contributor we need them to be."

The bridge Ball wants to take is a familiar one.  According to McLeod, Ball is “ counting on infrastructure money from the federal government to help out some, and he’s also taking a close look at the equalization formula, to see if the province can wring any more money out of Ottawa.”

What are Ball’s options in Ottawa?

Equalization not an option

Let’s get this clear:  Equalization is not an option for Newfoundland and Labrador.  The provincial government just doesn’t qualify. The only way Newfoundland and Labrador will get Equalization again is when it qualifies to receive the hand-out under the formula.  In other words, the provincial government’s own-source revenue has to be lower than the average used to calculate entitlement.

The odds of some special arrangement are pretty slim as well.   Danny Williams burned that bridge and dynamited the abutments with his hysterical behaviour between 2004 and 2008.  Two successive federal administrations cut William off at the knees the more outrageous his behaviour became.  There is still no sympathy in Ottawa for a province that had huge financial resources and put itself back in a hard spot through the stupidity of its own politicians.

The same is true in other provinces.  Danny Williams stormed out of a federal-provincial conference in the fall of 2004 to avoid the tongue-lashing his fellow Premiers were set to give him. The attitude among the provinces to Newfoundland and Labrador hasn’t improved any in the meantime, again considering the enormous advantages the province has had. 

The 2005 Arrangement

As SRBP noted in August 2014, Clause 8 of the 2005 offshore arrangement committed the provincial and federal governments to review “the current arrangement” no later than 31 March 2019.

This gives Ball an option but it will be primarily a political option.  The federal government isn’t obliged to do anything but participate in the review.   The federal government would only provide the provincial government with cash based on a political argument.

That’s, again, where Ball is in an exceedingly weak position.  The provincial government’s current financial mess is not the result of fate or misfortune.  It’s the result of stupid decisions taken knowingly by politicians.  Dwight Ball may think the current situation “unfair,” as he put it to McLeod, but few others across the country would agree. 

The province has unquestioningly been the principle beneficiary of the 1985 Accord.  If the province has failed to achieve lasting benefit – Clause 8 (b) – that would only be the result of provincial mismanagement, not anything else.

Any “fiscal disparities that then exist between Newfoundland and Labrador and other provinces”  (clause 8 (d)) are also the result of provincial mismanagement.

The two parts of clause 8 the province might use are related to the Equalization arrangements that exist at the time of the review and “Newfoundland and Labrador’s undeveloped offshore petroleum discoveries.”

One part of the transfer arrangement that provincial histrionics lost in 2004 was a clause that provided for a second set of offset payments tied specifically to Hebron.  The provincial government might be able to persuade the federal government to restore this idea.

Similarly,  the provincial government might be able to work out  new financial arrangements with the federal government  for any projects outside the 200 mile economic zone.  That’s where we will need a new royalty regime anyway in order to deal with the Law of the Sea convention.

There is some room under the 2005 arrangement for at least opening talks. The question in 2016 will remain, as it was in 2004,  what the federal government might ask in return for its generosity.  Once you open the 1985 Accord,  you put all sorts of things on the table that could directly affect the future of the province.

Term 29

The financial terms of the 1949 Terms of Union between Canada and Newfoundland are all spent.

The McNair commission, appointed under Term 29, recommended a payment of $8 million to settle the requirement under Term 29.  After a dispute between St. John’s and Ottawa over the McNair recommendation,  the Liberal administration of Lester Pearson implemented an annual payment to Newfoundland.

The federal government continued to make this payment until 1996 when Brian Tobin’s administration negotiated a lump sum payment, representing 20 years of payments.  The provincial government received $50 million in the initial instalment and three subsequent payments that amounted to another $80 million.

In 1996,  federal and provincial officials both indicated the so-called Term 29 payments would resume in 2016 and continue in perpetuity.

At $8 million,  renewed Term 29 payments would scarcely cover a portion of the interest on the borrowing needed to cover the current deficit.  If the provincial Liberals wanted to do something with Term 29, they’d need to significantly increase the payment.  The big question would be how much.

Whatever figure they might – theoretically obtain – would be far less than Ball will need.

The price

The first hurdle Newfoundland and Labrador would have to overcome is a willingness to pay cash in the first place.  There’s no legitimate argument to make for it. The biggest thing working against Newfoundland and Labrador is that its current financial problems are entirely the result of government mismanagement. They are not the result of any unforeseeable, natural disasters.

As such, the provincial government couldn’t claim that the deal itself from 1985 was fundamentally flawed. In 2004, Danny Williams and Loyola Sullivan lied.  They wound up having to admit to the lie in public in exchange for the fixed pot of cash from Ottawa. 

Dwight Ball will have a more difficult task trying to get cash from Ottawa.  But for the sake of this discussion, let’s assume he can make a case. Well, fixing the size of a renewed Term 29, for example, might wind up being the least of Newfoundland and Labrador’s worries in any talks with Ottawa for more transfer payments.

The major worry for Newfoundland and Labrador would be that we don’t know what the federal government might seek in exchange for any generosity. The same sort of problem came up in 2004.  Williams originally wanted to change the original 1985 agreement.  As it is, that would have had drastic consequences, costing the province its local preference powers under the Atlantic Accord.

Given that this is the second time in roughly a decade in which the provincial government has gone to Ottawa looking for a bail-out, the federal government might want to attach some strings to any money they coughed up.

The smallest constraints could be a cap on the amount and the period of time over which they’d pay the money. A more significant constraint would be a limit on how the provincial government could spend the cash.

Under the circumstances, the federal government could go much farther. They could insist on the appointment of a financial advisor to the provincial government.  This position would be unprecedented since Confederation but it is precisely the sort of condition Newfoundland faced before 1934 as it tried to cope with a massive and chronic deficit problem.  The advisor could have to approve provincial budgets and would be responsible to the federal finance minister for the federal cash.

If the review was under the 2005 arrangement the potential costs to Newfoundland and Labrador could be much greater. The federal government could look for a change to the fundamental financial arrangements under the original deal from 1985. The scope of Clause 8 is that broad.

The Central Policy Challenge

In the first Williams administration,  the major policy dispute was between the finance minister and the premier over spending.  Once Loyola Sullivan quit politics in 2006,  Williams and his enablers were able to abandon sound financial management in favour of the spendthrift management that created the mess faced by the Liberal administration elected last year.

As it stands right now, the major policy disagreement in the new administration would seem to be precisely the same. Finance minister Cathy Bennett seems to understand the magnitude of the financial problem the provincial government faces.  Dwight Ball’s comments over the past two weeks don't sound like he shares Bennett's views.

That may change over the next three months but those three months might seem like an awful lot longer for Dwight Ball.  In order for the new provincial administration to deal properly with the mess the Williams’ Conservatives created, Ball will likely have to shift his head the most of anyone in the new Liberal administration.