15 April 2019

Budget 2019 Context #nlpoli

Most of the commentary about Budget 2019 on Tuesday will be focused on the short-term.

Here are some slides that show longer-term trending.  We'll update them later on with the Budget 2019 figures.This is the sort of stuff that bears watching especially since the announcement of a new federal transfer payment came with the unexplained claim that it will magically reduce public debt and return the government to surplus over night.

Spending versus Income - The chart shows cash spending (black) compared to own-source revenue (red). 

The provincial government covered the gap between the two lines with borrowing, federal transfers, or a combination of both.

The forecast in 2018 for the new budget showed an increase in the gap as government spending increased while income stayed roughly the same as 2017.

It will be interesting to see what the actual 2018 performance looked like and what the 2019 forecast shows.  Did the gap get wider or did it narrow?

Surplus/Deficit - Budget 2018 forecast a larger cash deficit than in either of the two prior years. That's not a good trend. 

The more cash borrowed - either short-term or long-term - the more debt the provincial government accumulates.  The more debt, the more money that has to go to pay the interest on the debt. The more money that goes to servicing the debt, the less money there is for everything else.

The Debt Servicing Threshold - The amount that goes to paying the interest on debt has been growing both in absolute terms and as a share of  the provincial government's own-source revenues (everything except borrowing and federal transfers)

A 2012 study of provincial debt argued that a province is in financial trouble when its debt servicing took up more than 25% of its own revenue.  Budget 2018 forecast that we'd speed past that point in the fiscal year just ending,

That's on a cash basis.  Using accrual accounting, the trend is still upward but we are not at the crisis point yet.

Dependence or Vulnerability - This isn't a common way to measure a government's financial vulnerability but it is very useful.

Alberta economist Trevor Tombe uses this comparison of natural resource revenues and deficit as a share of spending to describe the extent to which a government is dependent on non-renewable resource revenues.  That dependence is a form of vulnerability since the the price of oil is volatile.

By this measure, Newfoundland and Labrador's budget has a pronounced dependence on oil.  Of the 12 years shown in the chart,  oil and deficits were higher than 40% of spending in seven of them.