That's not surprising given that the entire budget communications program was the product of precisely the same folks who delivered repeated political and policy disasters for the former Conservative administration. And if that wasn't bad enough, everyone - the Liberals included - picked the anniversary of the Titanic disaster to deliver a very hard budget.
To get a sense of the problems with Thursday's budget, take a look at two fine examples of just how politically tone deaf the speech was.
The first one: "As our Premier has said, knee-jerk reactions have created mistakes that, unfortunately, Newfoundlanders and Labradorians are paying for now."
Bennett's speech writer didn't give an example so folks will likely fill in their own.
The example they can easily turn to is Dwight Ball's knee-jerk decision this time last year to make the HST increase in Paul Davis' budget the centrepiece of his financial message. Despite good advice to pick something else because of the likelihood he'd have to reverse himself Ball jerked his knee against the HST right up to the fall.
Then Dwight burned huge amounts of political capital to have the federal government reverse the planned hike at the last minute. Everyone warned him against the move since we knew - at the moment Ball talked to the Prime Minister - that we were in a really bad spot.
Now Ball has put the sales tax hike back and added another $600 million in tax and fee hikes on top of it. The bad policy choice was one thing. Doubling down on the bad choice was another, but to produce a budget speech that raised the issue yet again is just astounding. A knee-jerk caused the problem at the beginning but resisting the right decision was every bit as bad and we are all paying for it.
The second dull sentence came right after that first one. "In this fiscal year," Bennett said, "debt expenses already exceed the estimates for the entire Department of Education and Early Childhood Development." That's terrible, no doubt. And it's absolutely true.
The Debt Burden
The reason our debt servicing costs are that high is because we have been borrowing so much money over so long a period. To see the borrowing, take a look at Estimates. That shows cash flows. The budget speech uses a different accounting method that hides some borrowing by calling it an investment. The debt servicing costs aren't figured out on the same basis as the budget speech, though. They are figured on the cash basis.
So here's what you get when you add the most recent deficits to the ones since 2007, taken from the cash budget.
Last year, the provincial Conservatives boosted spending by 12% and forecast a cash deficit of $2.0 billion. They actually produced a deficit of $2.6 billion, which is pretty much all new debt. This year, the provincial Liberals plan to boost spending by another 12% to achieve a record deficit of $3.0 billion.
Let's look at it another way.
The black line is revenue. Income, including all the new fee hikes, tax increases and the like, will go from $5.0 billion last year to $5.5 billion in 2016, according to the budget forecast. That includes federal transfers. The blue-green line is spending. Outflow will go from $7.6 billion in 2015 to a staggering $8.5 billion in 2016.
On the revenue side, oil has caused the biggest drop. Government overspending has been so large over the past decade though that even of oil revenues doubled, we'd still have a massive deficit problem. On that spending line, the single largest increase is in debt servicing. Debt servicing is going up because of one thing: Muskrat Falls.
Government debt over the past three years has grown on a cash basis by the burden of Muskrat Falls. Here's the table from the Estimates that shows the jump.
From $6.7 billion in 2013, debt climbed to $11.5 billion in 2014 with the borrowing under the federal loan guarantee. There's another $3.6 billion since then and there is another $1.3 billion in new borrowing for Muskrat Falls this year.
We are not done yet. The politicians want you to believe the project is too far gone to stop. The truth is that onl the transmission line to the island is close to completion. The rest of the project is at 40% completion or far less according to EY.
For all that, they will still have to borrow $1.8 billion or so to cover operating expenses. On top of that, they will have to borrow $1.3 billion for Muskrat Falls in this year alone. We will add $3.0 billion in new public debt this year alone to cover Muskrat Falls and the government's own budget problem. We will have to continue to borrow solely for Muskrat Falls until the project is finished sometime in 2020. We can never be sure how much we will have to borrow because the project is not even half finished yet.
As the total public debt grows, the cost of interest payments will increase every year. Each year, the government will have to cut a bit here and increase taxes or something to bring in new money there in order to help keep down the deficit. We will be paying chiefly for two things by 2020: health and debt. Each year between now and then we can expect less and less in the way of public services so that we can shift more and more money to debt servicing for Muskrat Falls.
There's not much hope of other money. Even with Hebron coming on stream within the next two years, oil prices are such that Hebron won't add that much to public coffers. The development deal signed by Danny Williams and Kathy Dunderdale gave the oil companies a huge and entirely unnecessary royalty break at the front end of the project. Oil prices won't climb back high enough to wipe out the deficit caused by Conservative overspending.
The result is that the new poll tax, similar to the one that brought down Margaret Thatcher, will not go away either. In the worst case, we will pay for increased electricity prices and the new poll tax. At the very least, the poll tax will simply become part of the massive increase in electricity rates needed to pay back the huge debt from Muskrat Falls. The poll tax may disappear from sight but it will remain simply because the only people who are paying for Muskrat Falls are the taxpayers of Newfoundland and Labrador.
The latest government prediction is that we will see a balanced budget in 2023. That's extremely optimistic. Continued weak revenues coupled with the twin debt spiral - Muskrat Falls plus the operating deficit will continue to create hardship for the foreseeable future. SRBP's own forecast matched the government's own a few months ago. Non-oil revenue won't make up the slack from the drop in oil. The likely rebound in oil will be relatively small and exceedingly short-lived.
What will be worse in the meantime is the political fallout. The Liberals did nothing to prepare people for Thursday's budget. The psychological shock of the budget was far worse than it needed to be. Things will get worse because the shocks aren't over. By June, people will see a massive hike in the gasoline tax. And then in July, gasoline costs will jump against as the provincial gas tax of 33 cents per litre gets hit with the 15% HST to double up on taxes.
Then there will be the talks with public sector unions that will going on for the next year. Every day, we'll have constant reminders of how hard things are and how much worse they will get. No one will be able to tell us how much longer the tough times will last. The public will become very unhappy and the longer they stay unhappy the worse things will get for the Liberals.
The Liberals have the same financial problems the Conservatives had. They also - entirely by their own choice - have the same communications problems as their predecessors. Rather than think the problems through and develop proper solutions, folks are just plodding through in the usual bureaucratic government way. The result is the unmitigated disaster that was the Liberal's first budget.
That means, ultimately, that the Liberals have a management problem that is every bit as real as the one that plagued Kathy Dunderdale and Paul Davis. The Liberal love of incremental change - or better still no change at all - just can't match a problem the size of the one the government is facing. They will either have to change their ways or risk getting sucked deeper and deeper in the rasputisa.
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