27 July 2020

Dwight and Tom's legacy: more of the same #nlpoli

Herb Kitchen died last week.

He was the minister of finance in the early 1990s who brought down the difficult budgets, starting in 1991 that were part of a plan that turned the provincial government around.

The deficit at the time was about $300 million and the total budget called for spending of around $3.2 billion. 

Finance minister Tom Osborne announced on Friday that he will need to borrow $3.2 billion to close the gap between what the government will spend (about $8.9 billion, plus more money for Muskrat Falls) and its income.

Officially, Tom Osborne’s deficit of $2.1 billion for 2020 will be 25% of spending compared to less than 10 percent back in Herb’s day.  But if you wanted to compare apples to apples, then we should use that $3.2 billion cash figure, which works out to a deficit three and a half times the size of the one Herb Kitchen brought to the House of Assembly 29 years ago.

Thank God Herb didn't live to see what a mess the provincial deficit will actually be.

Since 2017, the provincial government “strategy” for dealing with its chronic over-spending problem was to modestly increase spending each year while hoping that revenue increases would close the gap.

As the table shows, it didn’t work. 

The annual cash requirement includes the annual deficit, borrowing related to the debt, and any borrowing needed for Nalcor for Muskrat Falls.  The amounts have been enormous each year.

What’s particularly striking from Tom Osborne’s news conference on Friday was not the forecast that total borrowing in 2020 would be about $3.2 billion, it is that the 2019 budget is now $880 million off where he estimated it would be last spring.  The deficit of $577 million originally forecast for 2019 once you take out the Hibernia asset-backed cash deal is now somewhere around $1.3 billion.

In the chart, we’ve shown that added deficit as the red bit.  This could add too much to the 2019 budget figures but frankly, the amounts are so large, this isn’t likely off by a significant amount.

The $3.2 billion for 2020 is taken from Osborne’s statement of the cash requirement – meaning the borrowing - needed to cover everything, including more borrowing for Muskrat Falls.  That figure is consistent with all the others. 

The deficit Osborne spoke about n Friday, calculated using accrual accounting, was $2.1 billion.  Let’s just understand right now that he picked the $2.1 billion figure to make sure it was less than the 2015 figure, which was the record to date.  Osborne will set a new record this year.  He just picked a number to make himself look good, just like he kept misquoting the bond rating agencies in their assessments of the financial state of the province and the government’s – meaning his -  management of it so that he would make himself look better.

The truth is that they have been warning since he took office about the deterioration in the government’s finances during his tenure.  The credit downgrades are not the things bond rating agencies give to finance ministers who are doing a good job. They are earned for failure and the record deficits in 2019 and 2020 are a sign of failure.

Make no mistake about that.

In 2016, the provincial government had a plan to reduce government spending.  That’s what needs to happen.  There’s a consistent gap between income and expenses of about $1.0 to $1.5 billion.  And while the 2016 plan had a lot of problems with it, there was a plan to reduce spending.  That went out the window in 2017 as Dwight Ball set his sights on winning a party confidence vote in 2018 and winning re-election in 2019.

Cathy Bennett quit, and Tom Osborne did what Dwight wanted.  He bought peace with the labour unions, which meant abandoning the 2016 plan.  In public, though, Osborne and Ball insisted everything was fine and the plan was on track.  But each budget became an ever-bigger lie than the one before, especially the falsified projections of the remaining years in original 2016 plan to hit surplus by 2022-23.  COVID-19 gave Osborne a big of an escape hatch but the change to the 2019 deficit figure shows just how far Osborne’s claims have been from the truth. 

There are three things to take out of this.

First, the root of the current problem is the strategic approach started under the Conservatives in 2006 to boost spending based on what they knew was unreliable income from oil royalties.  They compounded the problem in 2010 with the Muskrat Falls project.

Second, responsibility for the continuing problem is the failure of the Conservatives in 2013 under Kathy Dunderdale, in 2015 under Paul Davis, and since 2016 under Dwight Ball, to change course once oil prices tanked.

You can tell oil is the problem, by the way, by looking at Osborne’s presentation on Friday.  Of the $631 million drop in revenue forecast for 2020, $560 million of it is from oil price changes.  All the other sources of government revenue – including the other two biggies for the treasury, sales tax, and personal income tax – are forecast to crop only by $71 million.

Third, the new Premier has some options about how to deal with the government’s financial problem, but we might be all overly worried that the new Premier will change direction any time soon.   Andrew Furey has already ruled out cuts and even John Abbott will find there is not much stomach anywhere in the province, especially in his caucus, for making changes to government’s direction.

As Osborne noted on Friday, the government has had no trouble getting lenders to hand over cash to the province.  There’s not much likelihood the markets are going to force the government to change its excessive spending. Lenders will be happy to make extra money off a province that will pay higher interest rates for the cash it borrows and that comes, explicitly or implicitly, with a federal guarantee.  Eventually, the markets will get tired of the game or capital will grow tight again – as it did in late 2015 and early 2016 – but for now there is money for Tom Osborne or his successor as long as the provincial government is prepared to pay the premium interest rates for it.

Those who are fond of historical parallels might look at things this way:  we are not in 1933.  In other words, the chance of a big change in the government's direction is small.  We are, however, somewhere in the 1920s.  The government can borrow more money and we will spend more money on debt service changes than we do on education. 

And that will go on.

The whole thing may come to an end one day, but not next month.