06 May 2019

The Financial Reality of Election 2019 #nlpoli

The financial reality confronting any administration after May 16 is the same regardless of which party wins the election. 
The government is unlikely to balance the budget in 2022, regardless of who wins the 2019 election. 

In 2019, as in 2015, the last government budget before the election did not accurately describe the government’s current or likely future financial position.  All three parties did not make this an election issue in 2015 and have ignored the government’s financial situation in 2019. 

The governing Liberals are running on their current budget, which is included in the campaign platform. They apparently have no new spending plans beyond the current budget. The Conservatives cost their plan at $254 million.  These promises must be assessed against the financial realities of the provincial government.

The Financial Situation

We can accept the government forecasts of revenue for what they are although there are some issues, as noted below.  We must add the following expenditures to the government's projected spending in 2020 and beyond.  These additional expenses are why it is highly unlikely the government will balance the books in 2022.

Revenue (Budget 2019)
(Budget 2019)
Surplus/Deficit (Budget 2019)
Bay du Nord

Muskrat Falls

Rate Mitigation

Revised Deficit
Mitigation (Full)

Debt Servicing

Worst Case Deficit

Accuracy of Government Public Information

As a general caveat, we should note that the provincial government does not provide essential  information about what amounts are included in its budget in either the accrual or cash accounting versions presented each year.  For example, the 2018 budget included a projection for carbon tax revenue of approximately $20 million.  In the current budget, the Budget Speech - which is prepared using accrual accounting  - includes all the money from the Hibernia Dividend-Backed Annuity Agreement but it is not clear if the revenue that will actually be received in each subsequent year is included in the annual revenue projections. The government  also has not explained the assumptions in the expenditure and revenue projections that are included in the commitment to achieve a surplus in 2022.

The lack of accurate, factual information makes it very difficult for anyone outside government, including members of the House of Assembly, to make reliable assessments of government’s financial statements at the time they are issued. What is presented here is an assessment based on the best information available. For the purpose of this commentary, we will assume the Hibernia money is money is included.  Given the amount of new spending and the relatively small size of the annual Hibernia-related transfers,  the variation between what is presented here and what eventually transpires should be as close as one can get.

Revenue and Expenditure Adjustments

Bay du Nord is expected to cost approximately $1.0 billion in construction costs.  The allocation here is the current government plan, namely that construction starts in 2020 and finishes in 2025.  Thus, the government must borrow an average of $200 million each year to meet these financial obligations.

As noted in the forensic audit prepared for the LeBlanc inquiry, Muskrat Falls will incur approximately $400 million in additional costs.  This will be covered by new debt incurred by the provincial government. This brings the total cost of the project to about $13.1 billion.

Rate Mitigation applies the $200 million from the Liberal plan that is allocated to the federal government. There is no federal statement to confirm this amount will come. As well, both the Liberal and Conservative plans include amounts that are best described as guesses or as speculative projections.  

The $200 million probably underestimates the impact of either plan since both involve directing money previously assumed to be new provincial government revenue after 2021 and directs it to rate mitigation.  This potential impact is reflected in the additional $300 million labelled Full Mitigation.

Debt Servicing reflects the added cost of the borrowing needed to cover the continuing deficits and new expenditure.

There is some additional expenditure uncertainty that must be borne in mind.  Bay du Nord may start later and costs will likely be higher than the current forecast. As well, the Conservatives have promised tax cuts, which is a form of expenditure, although it will affect revenue.  Tax cuts increase the deficit unless they are offset by expenditure reductions.

Projections must also allow for some revenue uncertainty. This includes oil prices, currency exchange rates, and taxation data. Oil prices are solely a function of the market and are subject to daily fluctuations.  Currency exchange affects both the revenue from oil, which is sold in US dollars, and the cost of servicing the portion of provincial debt that is held in US dollars. There is also a two-year lag in the receipt of detailed information on income tax revenue, which is collected by the federal government on behalf of the province.

The Political Dimension

Short of a major financial catastrophe, it is unlikely the government’s financial trajectory will change.  A major catastrophe would be a collapse of oil prices or a credit restriction that would prevent the provincial government from incurring enough money to meet its obligations.

The current administration abandoned its 2016 budget plan approximately 14 months after it started. If re-elected, Dwight Ball is unlikely to make any changes to the government’s current trajectory unless forced to do so. The members of the Liberal caucus, primarily interested in securing their pensions and possibly becoming ministers in a post-Ball Liberal administration, would have no interest in doing anything that would jeopardise their political future.

If the Conservatives form an administration after the current general election, they face a problem similar to the one faced by the Liberals in 2016 but with some twists. The Conservatives are campaigning on new spending, in the form of tax cuts and new programs.  Their support would be based, in part, on public anger over the 2016 budget measures. Since addressing the current budget problems would mean more significant measures than those needed in 2016, it is unlikely the Conservatives could find public support for action.

Even if Ches Crosbie himself were interested in addressing the government’s financial problems, none of his candidates appear to have the background and inclination necessary to implement more significant reforms than the ones undertaken by the Liberals in 2016 and abandoned in 2017.

Crosbie’s campaign mirrors the Liberal approach in 2015 in that it capitalises on public anger at the current administration.  That anger is based on broken promises, such as the increased HST.  The Conservatives had proposed a two point hike in the rate in 2015 but Ball campaigned against it as a “job-killer”. Ball subsequently rescinded the increase but reinstated the hike weeks later in the 2016 budget.