06 April 2020

Financial Fustications #nlpoli

If we had Equalization, we'd have a budget surplus.

On Friday, 20 Mar 20, Premier Dwight Ball wrote to the Prime minister to say that the financial arse was out of Newfoundland and Labrador.

Ball included in the letter not a shred of financial evidence nor did he include any hint as to what exactly he expected the federal government to do to fix this situation.

Last weekend, once the public heard about this alarming letter, the Premier was anywhere and everywhere confirming that the provincial government was mostly, completely destitute.

*This* weekend his finance minister is – not surprisingly – telling a completely different story. 

Osborne needed to change the government’s messages in order to reassure the markets, not to mention the people of the province, that things were okay at least in the short term.

Everything’s okay.

We got by with a little help from the federal government.

The provincial government didn’t need that last $200 million it hadn’t borrowed since last November but by the end of the fiscal year – quite literally on 30 and 31 Mar – Tom Osborne’s had managed to cobbled together a couple of hundred million in short- and long-term debt under the old fiscal year.

And, while Osborne didn’t use these figures himself, we know thanks to other sources that the provincial government has been able to borrow another $464 million of the $2.0 billion it needs – so far in 2020.  That fiscal year started on Wednesday. 

So, three days into the new fiscal year and Osborne has already eaten through 25% of the borrowing he needs for the whole year.

Where might this end, NTV’s Michael Connors asked Osborne last week for Issues and Answers.  Could it mean a deficit of $2 billion?

Oh, quite possibly yes, said Osborne.  We had already forecast a deficit of $1.2 billion before all this Covid-19 stuff happened and the arse fell out of the oil markets. So, while Osborne didn’t spell it out, the drop in income and the extra spending from COVID could easily add another $800 million to the deficit.

Connors mentioned Moody’s estimate that the deficit could reach 25% of revenue.  That would be roughly $2.0 billion give or take, on an accrual basis. 

On a cash basis, the deficit would be well over $2.0 billion.

There are a few things to note here, COVID to one side.

For starters, the revised deficit for 2020 was already 50% higher than Osborne’s estimate last year. COVID just made that worse by some amount no one can calculate yet.

So, before we even get into the impact of COVID, the provincial government was already way off track to balance the books by 2023 despite Osborne’s repeated claims everything was fine.  This is in Moody’s statement as well since the bond rater already acknowledge the government would face intense pressure to spend more than it took in after 2023.

Things are not really okay.

Rate mitigation talks with Ottawa – as Osborne told Connors – are on the back burner.  On the one hand, that’s not a big deal since COVID has pushed the date for Muskrat Falls first power back a bit anyway.

On the other hand, though, the government is going to be in even harder shape once this is all over and it is in hard enough shape now.  Osborne told VOCM that the economic impacts of COVID and oil prices will last well into the future.   

And since the government’s mitigation scheme was dodgy all along, even with a bit of federal help, the provincial government’s financial situation means that the next administration will have to rethink what it is doing once Dwight Ball finally gets out of the Premier’s Office.

The $700 million in borrowing approved for Hydro (Hydro debt was below its ceiling before the House approved a new ceiling) is unrelated to COVID.  Cabinet approved the change on 20 Feb 20 before sending it to the House.

So what's it about? 

And lastly, there's Equalization. 


Tom talked about it last week, suggesting that if the provincial government got the Equalization payments from Ottawa to which it was somehow entitled,  we'd have a surplus.

For the past decade,  provincial politicians and bureaucrats been misrepresenting Equalization, frequently helped by Wade Locke, now head of the economics department at MUN. Locke's misrepresentations of Equalization, Atlantic Accord provisions, and oil royalties in 2004 and again in 2007 fueled public support for the provincial government's political fights with Ottawa.

As finance minister Tom Marshall blamed deficits after 2009 on the loss of federal handouts, even though oil royalties in some years were at least four times the Equalization "loss".

And since 2015, Dwight Ball and Tom Osborne have talked about Equalization relentlessly. 

All of this is an excuse/misrepresentation hard-wired to the bureaucracy and readily repeated by politicians. Clamouring for federal hand-outs is politically easier than taking the tough political decisions of adjusting to decreased revenue. 

No surprise, therefore, that Alberta, Saskatchewan, and Newfoundland and Labrador whine about federal handouts despite having more than enough revenue to meet their provinces's needs.  

The difference in the way politicians talk about federal handouts  - Alberta complains about the welfare bums it supports; NL wants to get EQ -  is rooted in the local political culture and historic political rhetoric. 

But the driver of the whining is the same.