16 June 2016

The Budget and the Economy #nlpoli

The Conference Board of Canada says the recent budget has tipped the provincial economy into a recession next year.

Finance minister Cathy Bennett says that's bollocks.

Let's see which is right.
Before we go any further, understand that what we are talking about are forecasts.  They are not Kreskin like windows on the guaranteed future.  That's the first thing to bear in mind.

Second thing, as you will notice if you pay attention to any of these forecasts,  they are all showing generally similar trends over time.

Third thing, is that these are forecasts for "real" gross domestic product.  That means they convert everything to the value of the Canadian dollar in a base, year,  namely 2007.  No one explains that and frankly, it's unlikely most of the reporters writing most of the stories understand that "real" isn't the opposite of "fake" in this case.

The opposite of using constant dollars would be using current valuations.  Some call this "nominal" GDP. In other words,  you can also look at growth in the economy using the value of the dollar as it would be in that year.  The "real" forecast might be different from the "nominal" one.

Now go to the Conference Board's news release.  They give a figure for economic growth this year:  0.2%.  In March,  the Conference Board was actually forecasting the province would experience zero growth in 2016.  The current forecast is actually an improvement from their assessment three months ago.  And if there is even a modest variation in any of the indicators they look at - like commodity prices - Newfoundland and labrador could see its economy grow in "real" terms or watch it shrink.

That's likely why the Conference Board didn't actually put a number on their 2017 forecast. Three months ago, they were saying that growth would be weak.  Now they are saying there won't be growth. Three months from now, their forecast could change upward or downward.

If you want to get a sense of what we are talking about here, look at RBC's assessment.  It is generally similar to the Conference Board.  RBC Economics expects that the Newfoundland economy will shrink by 0.3% this year and 0.9% next year.  TD's April forecast had the economy shrinking this year but expanding slightly next year.

If you want to see how the real and nominal GDp forecasts differe, look at the RBC numbers.  Here's the table:

While RBC says the economy will shrink next year measured in 2007 dollars,  they are actually forecasting almost 5% in growth nominally.  And since the government spends money in the current day, not on 2007 valuations,  we are looking at growth.  If the RBC forecast comes true,  employment will shrink  by two percent and retail sales will be close to a flatline.

But hey, we knew all this anyway.  Everyone has been forecasting that the province will go through a really rough couple of years.

What about Bennett's claim that the budget had nothing to do with the recession?

Well, that's a bit like the hype that the budget caused the recession.  There are folks playing on the "budget caused the recession" line because it is controversial and will get lots of people excited .  That's the news media interest in the sensational Conference Board claim and it is precisely why the Conference Board hyped the "recession claim:"  it gets them lots of coverage.  And for others, like the opposition parties and the unions,  they can just try to score some easy political points.

The thing is that the government plays a big part of the economy.  The government couldn't do anything to deal with the massive deficit without having some impact on the economy.  Raising taxes,  cutting spending, laying people off, all would have the effect of taking money out of the economy.  That's pretty simple stuff.

And if the government had ramped up spending, they'd have created a problem as well.  The only way they could have boosted spending was by borrowing even more than the $3.4 billion they have to borrow now.  Imagine how the economy would shrink, though, when the government couldn't borrow all the money some folks want.  As it is, the Liberals might not be able to borrow all the money they need this year.