The M-shaped recovery

You’ve heard of the W-shaped recession.

Now think about an M-shaped recovery in the middle. Rather than two dips and then a rise, this would be a rise, followed by a dip, then another rise followed by another big dip.

Regardless of what letter the graph looks like, the latest news suggests the global economy is not ready to go surging back to the world some pundits and speculators would have you believe.

Retail sales in the United States dropped in May, down 1.2 percent from April.  if consumer spending will drive the recovery, then that isn’t good news. Automobile sales and building supply sales were down as well.

Oh yes, and gasoline sales in the U.S. dropped as well.

In some other places, this all might be just another bit of news to skip over on the way to football scores.  But when you live in a province that is increasingly  dependent on exports to the United States, including oil exports, then this isn’t welcome news.

Nor is it welcome to find out that the Chinese have developed a way of producing  a low-cost version of nickel instead of the highly refined version currently in wide use to make stainless steel.  The Chinese output, called nickel pig iron,  is profitable at current world prices for nickel of US$8.50 a pound, according to the Globe and Mail. Compare to the 2007 price of US$24 a pound.

“It does put a cap on world nickel prices. If not in practical terms, at least in psychological terms,” concedes David Constable, vice-president of investor relations at Quadra FNX Mining Ltd., a Canadian company that began as a Sudbury nickel producer but has diversified its production to focus primarily on copper.

BHP Billiton Ltd., the world’s largest mining firm, has already turned bearish on nickel and sold some of its mines. The emergence of NPI was a key factor in the decision, analysts say. They expect the Chinese product’s impact to only get larger with time, as more producers enter the fray.

In Newfoundland and Labrador, Vale Inco workers are still striking against the company.  Production is still going on using replacement workers.  The provincial government recently encouraged both sides to settle the dispute, and with good reason. Government revenue from mining royalties is expected to drop yet again and having the Vale Inco mine at Voisey’s Bay anywhere but at peak production doesn’t help deal with a projected billion dollar cash shortfall. Every nickel counts.

A new low-cost way of producing nickel for steel-making also doesn’t improve the financial picture for the Vale Inco smelter project at Long Harbour.  That project remains the largest capital works project in the province. The provincial government is counting on Vale Inco to help boost the economy in the province both during the construction phase of the Long Harbour project and then with subsequent production of refined nickel.

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Oil’s down, budget pucker factor up …again

When you project an average price of oil at US$83 and forecast a billion dollar budget shortfall on that basis, having oil at US$71-ish must make the old sphincter twitch a notch tighter than it used to be.

Heaven only knows what other economic news does.

Kinda makes all that effort spent on poll goosing seem…well…a tad bit…silly.

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Where the money goes – 15 years later

Just to put the Strategic Social Plan (1995) in a bit of context, you should realise that health care spending as a share of the provincial budget has increased dramatically in the past 15 years while other sectors have stayed the same or decreased.

The change is actually quite dramatic – 10 percentage points – from 265 in 1995 to reportedly 36.8% in 2010.  In dollars, spending on health care has tripled in the province since 1995 and the health share of the budget going from $933 million to $2.7 billion in a decade and a half.

This chart compares the 1995 figures from the Estimates with the recently tabled budget. It corresponds to a chart (Figure 2) from the 1995 Strategic Social Plan consultation paper. The light blue line represents the 1995 budget while the purple-blue line is the current budget estimate.

The province’s business development and economic diversification efforts – ITT then and INTRD and Business today – take less of a share of the budget now.  That’s despite government claims that it has a plan to expand the economy and that the plan is in place.

Mind you, the amounts spent have increased.  For example, the cost of operating the departments has gone from about $50 million for the Industry, Trade and technology department to about $66 million spread over Business and Innovation, Trade and Rural Development today. 

The amount available for business investment is also up:  $18 million then compared to $29 million. Even then, though, the province’s business department -  the vehicle through which Danny Williams was once supposed to personally reinvigorate the provincial economy – actually doesn’t do very much with the cash in the budget.  Sure there are plenty of free gifts – like Rolls Royce – or the apparently endless supply of cash for inflatable shelters. 

But as the Telegram discovered two years ago, the provincial government spent nothing at all of the $30 million budgeted for business development in 2007. And earlier this year the Telegram confirmed that in the past three years, less than one third of the $90 budgeted for business attraction was ever spent.

Spending on education is down as a share of the overall budget, even though the amount spent is up from $763 million to $1.2 billion.

Interestingly, the most dramatic decline has been in what the budget estimates call Consolidated Fund Services.  Basically CFS covers all those expenditures that it takes to pay the interest on the public debt, maybe retire whatever tiny portion comes due each year, cover bank charges and  that sort of thing.

As a share of the budget, CFS has gone from 17% to 6.6%.  In dollars we are talking $403 million this year to service the public debt and another $87 million to cover employee retirement plans.  Fifteen years ago, the figures were $544 million and $60 million respectively.

Some bright bunny out there is likely hopping up and down thinking that the big improvement there is due to the actions of the current administration in paying off debt. 

Some bright bunny like innovation minister Shawn Skinner, speaking in the budget debate last week:

Our net debt, that big yolk around our necks that everybody talks about, that big millstone that drags everybody down which was about $12 billion - that is billion with a ‘b’ - when this government took office is now down by $3.9 billion to just under $8 billion. We have gone from a twelve-billion-dollar debt down to an eight-billion-dollar debt in six short years. Now, that is good economic policy I would suggest to you, Mr. Speaker. That is good fiscal policy and that is something that the people of this Province understand and appreciate. I do not have the figures right in front of me …

Well, not exactly.

The taxpayers of Newfoundland and Labrador actually have greater liabilities now than they did in 1995. 

What Skinner mentioned was net debt – liabilities less any assets – and that figure has actually gone back up in the past year.  Why?  Well because the provincial government had to dip into its cash reserves to avoid borrowing money from the banks to cover the $500 million they were short last year.  It’s also a couple of billion or so beyond what it was in the bad old days of the mid-1990s when the provincial government had no where near as much cash flowing in as it does today.

There’s no real point in going into the debt charade Skinner and his colleagues have been foisting the past few years. Regular readers of these scribbles are well-used to the argument.

What we really have to look at are the things that make the cost of carrying that debt lower today than in 1995. 

For one thing, interest rates are much lower than they were when some of that debt was incurred in the 1980s.  As old debt at high interest rates has matured, successive administrations simply rolled it over at much lower rates.  In that respect, the current crowd are doing exactly what the former crowd used to do. It’s a perfectly sensible thing to do when you don’t have the cash to pay debt off.

For another thing, the debt today is pretty much all in Canadian currency.  In the 1990s, chunks of the debt  - upwards of a third of it - were in American dollars and Japanese yen.  The weak Canadian dollar over the years meant that the taxpayers shelled out bundles in order to pay interest in higher valued currency.  Starting in the Wells administration, the provincial government started rolling over that foreign debt and borrowing Canadian.  That has saved the taxpayers hundreds of millions over the years.

For a third thing, the direct provincial debt  - the money the provincial government itself owes – has been dropping again from the high incurred during the Williams administration. Yes, that’s right for all the pitcher plants clogging the local media Internet sites thinking other. 

The direct public debt actually hit its peak of almost $7.0 billion under the current crew.  In fact,  the guy the pitcher plants and Fan Clubbers love to hate – Roger Grimes – left office in 2003 with the provincial government direct debt lower than the direct debt under Danny Williams today:  Grimes = $6.5915  billion versus Williams 2010 = $6.6468 billion. 

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NL economy “fragile”: Williams’ finance minister

“When there is uncertainty, when the economy is fragile, government steps into the breach.”

That’s the way finance minister Tom Marshall explained the reason behind the Williams administration’s plan for three more years of deficit spending including a projected deficit in 2010 of nearly $1.0 billion on a cash basis.

Marshall made the remarks in an interview with CBC’s Debbie Cooper Monday evening.

In his budget speech Monday, Marshall forecast accrual deficits of between $156 and $194 million to follow the accrual deficit of $294 million in 2009.  Marshall gave no forecast of when he expected the provincial government to balance the books again or return to surplus.

In the past, Marshall has explicitly rejected the idea of balanced budget legislation.  Earlier in March, Danny Williams dismissed balanced budgets saying that delivering “balanced budgets is just achieving a number.”

During the interview Marshall referred to the deficit for the year just ended as being half a billion dollars,  after a string of surpluses which he said totalled almost four billion.

But that’s an odd mixture of numbers. Since 2007, the provincial government has kept two sets of books, delivering the finance minister’s budget speech on an accrual basis and delivering the Estimates on a cash basis. Marshall and one-time finance minister Jerome Kennedy typically have referred only to the accrual numbers.

They never mention the cash numbers since they show deficits in all but two years since 2003. And last year’s deficit of $494 million was on a cash basis.  That’s the half billion Marshall mentioned.

But on a cash basis, the Williams administration only produced a cash surplus  - the same figures Marshall used - in two years since taking office in 2003.  In every other year, the Williams administration had to borrow to make ends meet.

Marshall’s 2010 budget forecast that trend to continue.

The green lines in the chart represent deficits.  In Fiscal Year 2006, the shortfall was $707 million, followed by $88 million in 2007.  There was a cash surplus in 2008 of roughly $820 million.

Marshall delivered a $494 million deficit in 2009 and forecasts a cash shortfall of $949 billion in 2010.  It doesn’t take a rocket scientist to realise that if Marshall is only half right in his deficit forecasts for the next three years, the Williams administration will add $1.5 billion to the province’s debt load over the next three years.

Even the deficit forecast for 2010 of $959 million is based on oil averaging US$83 over the next 12 months.  If oil were to average US$70 a barrel -  as it did in 2009 -  the deficit would balloon by another $500 million.  In other words, oil royalties would be only $1.6 billion compared to the $2.1 billion forecast.

And if all other projections held, the 2010 deficit would be more like $1.4 billion in a single year rather than what Marshall forecast on Monday.

None of that includes any debt incurred by the province’s energy company to pay for construction costs on its share of oil projects or the Lower Churchill. Both would show up on the provincial government’s books since NALCOR energy and its subsidiaries are owned wholely by the provincial government. At the same time, the province’s oil and gas company isn’t required to pay any royalties to the provincial treasury like other oil companies.  Instead, NALCOR will pocket the cash, pay off debt or use it to fund other projects which also likely won’t generate any money for the provincial treasury.

The apparent surpluses Marshall claimed during his interview were actually paper transactions resulting from the accounting practice of distributing the one time advance cash transfer payment from Ottawa in 2005 over the fiscal years in which the money was actually earned.  In 2008, an apparent surplus of almost $2.5 billion on an accrual basis produced an actual cash surplus of only $820 million.

The one-time transfer was used to reduce unfunded pension liabilities.

No other money was received under the 2005 deal before it expired in 2009.  The provincial government will receive one last cash download as a result of the 2005 agreement but that amount is based on the 1985 Atlantic Accord.

Approximately $1.8 billion in temporary investments apparently held by the provincial government would not be enough to cover the likely cash deficits over the next three years, based on current budget projections. 

There is no explanation for Marshall’s claim during the CBC interview that the provincial government had the cash to cover the anticipated shortfalls.

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Burdening our children with increased debt: fish centre costs escalate wildly

An aquaculture centre that was supposed to have opened in 2009 for a cost of $4.2 million will now cost $8.8 million and construction isn’t set to start until later this spring.

Cost of the project shot up 22% in 2009 alone on a project that even then was already 71% over budget. Former fisheries minister Tom Rideout announced the project in 2007 as part of government’s pre-election vote buying orgy of public spending.

The provincial economy shrank by 26% in 2009.

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Budget 2010: prep work

Some things to watch for in Budget 2010:

1.  Deficit 2009.  Check to see how big the accrual deficit is, but expect that to be pretty much zeroed out.  The pension plan should have recovered its paper losses and with revenues being higher than the deliberately lowballed forecast, some people might be fooled into believing things are healthier than they are.

Just remember that as he headed out the door Paul Oram described provincial government spending as unsustainable.  The finance minister said the same thing.  Odds are government will try and make things look smurferrific by pointing to the accrual numbers but don’t be fooled.

Check the cash deficit in a document titled the Estimates.  That will give you a picture of what the actual cash flows looked like in 2009. Budget 2009 forecast a cash shortfall of $1.3 billion.  The cash statements will give you a good sense of whether the the provincial government will have a significant financial problem in the medium- to long-term.

Your humble e-scribbler would expect a cash shortfall of something on the order of $800 million. 

That would make it the largest cash deficit in Newfoundland and Labrador since …well…ever and certainly since 2004.

In previous years, oil revenues erased just about every one of the projected cash deficits.  This year expect something closer to what they forecast a year ago on a cash basis.

That’s because…

2.  Oil revenues should be down.  The only question is by how much.

The finance department’s Decemberish estimate was for a drop of 30% which would bring in royalties of about $1.7 billion. The March 2009 prediction was for revenues to be half of what they were in 2008.

As it turned out, that was a pretty good estimate.  In the first half of the fiscal year royalties were down by almost 60% from where they were in 2008.  That was actually about 15% below the forecast in March 2009.  The year actually started off worse than the low-balled finance department estimate.

The December financial update claimed there’d be a jump in revenue from forecast but oil production figures – one of the revenue factors – stayed persistently below the volumes needed to help generate the cash.

Again, check the revenue figures in the Estimates. And don’t forget your humble e-scribbler had to get information from the feds because provincial finance basically refused to release any information. In itself that’s a reason to put a question mark over what’s coming.

Your old e-scribbler wouldn’t be surprised to see oil royalties of about $1.5 billion for 2009, give or take a couple of hundred million.  Just remember what finance minister Tom Marshall said during debate on the interim supply bill last week:

While production, natural production will come back when Hebron comes on, but it is never going to come back to what production was two years ago; unless, of course, we discover additional fields, such as in the other basins where they are continuing to explore…[Bold added]

Production is one factor in determining royalties.  Price and percentage are the other two.  Since we know the percentage and the price is unlikely to zoom back up to the stratosphere of mid-2008, we can reasonably expect the provincial government will have less money in the future than it has had in the past couple of years.

There are not new ideas.  Regular readers have seen them discussed before.

And that pretty much jives with something else…

3.  Other revenues were down in 2009, too:  Marshall put some numbers on the table in January and February during a series of speeches across the province.

• Personal income tax revenue for 2009 should come in somewhere around $800 million. That’s above forecast but remember that they lowballed the figures.
• Sales tax should be about $600 million.  That’s way off the forecast of $728 million.
• Mineral tax and royalties should be somewhere around $184 million.  Again that’s a wee bit above the forecast of $171.6 million

4.  Check the deficit forecast (cash) for 2010 and beyond it.  Revenues aren’t going to climb so the provincial government needs to lay out a plan on how to bring the books back into balance.  Deficit budgetting is what got us into a financial mess over the course of decades.  if the current administration doesn’t have a plan to balance the books sooner rather than later than we’d all better start wondering.

Former Bank of Canada governor David Dodge pointed out over the weekend that Canadians can expect health care costs to outstrip revenue growth by about 1.5% in the decade ahead. That’s just one aspect of the demographic challenge our province is facing but it is a very significant one.  The problem can’t be made to disappear with magical thinking or the cavalier dismissal that balanced budgets are just numbers on a page.

5.  We’ve been living in a fiscal house of cards and the house is collapsing. Take a look at the growth in interim supply spending since 2004, shown above in thousands of millions of dollars.   In six years, the interim supply spending has pretty much doubled;  it’s gone from 1.2 billion to 2.3 billion.

In four of the past six years, the leaps have been double-digits;  from 10.2% in 2007 to 17.5% in 2009.  This year it is seven percent above the year before.  The average increase in spending is 10.8%.  At that rate, the provincial budget in 2014 would be about $10.5 billion.

Just remember, though, that as Tom Marshall noted, oil production won’t be what it has been for the past two years.  Oil prices won’t be skyrocketing either and as such, provincial government revenues won’t be growing at the rate of 11% per year or better.

If provincial government spending continues to grow as it has since 2004, it won’t be very long before this province is in the same state it was during the late 1980s.

 

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House to open two weeks late

Surprisingly this didn’t get announced yesterday – on a government holiday – along with the news Hisself had returned to work.

The House of Assembly will open with a Throne speech next Monday, March 22.  That’s two weeks late.

If past speeches are any guide, this one will be a truly mind-numbingly hideous piece of verbal diarrhoea.

No mention of what happened to the old session which was adjourned before Christmas but not ended.  Normally the House would meet and conclude the old session.  Maybe the word normally used for that – prorogue – is not in fashion among Conservatives any more.

Anyway, the finance minister will deliver a new budget a week after that, Monday March 29.

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Firds of a bleather

Provincial finance minister Tom Marshall, speaking in Corner Brook in mid-February:

“Now we have to benefit from new industry, benefit from the knowledge economy, the innovation economy.”

Adios “stimulus”. 

Innovation is the new buzzword on provincial Tory lips.

And then a couple of days before the federal budget, you’ll never guess what federal Tories are saying, well according to Globe and Mail sources:

The Harper government's Throne Speech and budget this week will try to shift the spotlight away from the billions of dollars in short-term stimulus and onto measures designed to generate higher-paying, longer-term jobs.

 

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A knowledge economy, indeed

Finance minister Tom Marshall, in mid-February 2010:

“Now we have to benefit from new industry, benefit from the knowledge economy, the innovation economy.”

Sure, Tom:

A spending freeze on funding for graduate students at Memorial University of Newfoundland is expected to affect hundreds of professors and students.

The university's administration is freezing funding for new graduate students, starting fall 2010 because the university's School of Graduate Studies is running a deficit.

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Oil production figures

BP gave you the numbers in November 2009.

Turns out the provincial finance department’s statistics division did a run of the same figures in October but didn’t make them public until January 2010, three months later.

Still, they projected oil production over the whole fiscal year would be down 21% from the previous year. They changed the exact numbers from 98 million barrels forecast in March to 101 million barrels by December and – in true political hyper-torque mode -  in the December financial update this was pushed an an increase compared to the forecast.

It was – obviously -  an increase compared to the forecast; but that only masked the fact they were actually forecasting a drop of 21% in production regardless of how you looked at it.

That, almost inevitably, will translate into a substantial drop in revenue as well.  Yet,  the December financial statement claimed there’d be only a modest drop in oil revenue from the blockbuster year in 2008.  The finance officials never did show how they came up with that calculation.

The BP forecast for revenues used used actual royalty figures from the federal natural resources department. They show the provincial government’s royalties tracking below the March forecast.

And while the treasury will pocket close to $200 million from the Hibernia transportation dispute settlement it’s still a bit hard to see how oil prices are going to rebound sufficiently to produce the extra $520 million in oil revenues – compared to March’s forecast  -  that the revised treasury forecast said would be in hand by the end of the year.

Still, the final tally on the budget update in December only shift the figures around slightly.  If it holds on track, the provincial government will still wind up borrowing close on a billion dollars in cash – either from the banks or from its own temporary cash reserves – in order to balance the books.

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Budget hints from Marshall

Excerpts from a speech by finance minister Tom Marshall, in Corner Brook, as reported by the Western Star:

Although he said the rate the province has been spending is not sustainable, Marshall said spending on new programs and projects will highlight the next budget.

“We have to get control now,” said Marshall. “I’m not talking about cutbacks. There will be new initiatives and programs, but we have to temper our expectations and we have to keep things under control. We have to make sure the spending we do today is sustainable for the children of the future.”

…

“We have to get control now,” said Marshall. “I’m not talking about cutbacks. There will be new initiatives and programs, but we have to temper our expectations and we have to keep things under control. We have to make sure the spending we do today is sustainable for the children of the future.”

…

“Now we have to benefit from new industry, benefit from the knowledge economy, the innovation economy.”

Knowledge economy.

Innovation.

Hmm.

Those ideas sound awfully familiar.

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Budget consultation farce: more evidence

Normally, budget decisions wouldn’t be announced until after the provincial government budget for the upcoming fiscal year is formally presented in the legislature.

Since 2007 – at least - that convention had gone out the window in Newfoundland and Labrador.

The fact that cabinet ministers announce spending priorities for the coming year starting in January also proves that the entire series of meetings the finance minister calls budget consultations are pretty much a joke and a half.

They are a complete farce, a cruel joke on the ordinary unsuspecting members of the public because – as the finance minister well knows – the decisions on spending are pretty much already made.

If the spending decisions weren’t made already, a cabinet minister could not announce on January 18 – some three months ahead of the budget being tabled in the House of Assembly - that a program would be funded for three more fiscal years.

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A statement of fact isn’t a criticism

Finance minister Tom Marshall told the Telegram’s Dave Bartlett a few interesting things in an interview that appeared in the Saturday print edition but hasn’t turned up on line yet.

Like this bit about the annual “consultation” farce:

He also said it's not true consultations are a waste of time or that he's made up his mind already on where he will spend taxpayers' money.

Marshall said every year someone raises that criticism.

"We're open minded. We're prepared to listen. But we're listening to a lot of people and the problem is ... everybody can't get what they want," he said.

Marshall said if he gets 100 proposals, 95 of them make sense, but there's simply not enough money to go around.

Okay well, the consultations aren’t a waste of time for Marshall since he uses them as a way of sending a message to people of the province.  He isn’t really looking for substantive input on how to spend public money.

That’s because – as your humble e-scribbler noted last year – the major decisions are already made. The same point turned up the year before, with an entirely different example of how the major spending decisions are already made long before the finance minister hits the road.

Not a waste of time for Marshall, but for anyone else looking to shift budget priorities via the consultations?  Yeah, pretty much an exercise in the utmost futility.  The people who show up for these things would have better chances of changing Marshall’s budget if they gathered around a kitchen table, held hands and stared at the magic blue spot from the National Enquirer all the while thinking nice thoughts.

And sure, Marshall listens.

But, as he noted, five percent are patently OTL.

And the other 95% of the ideas he listens to are sensible.

But Marshall can’t do anything about them because he just doesn’t have the money for them, as he told Dave Bartlett and the Telly.  A guy who has more money in temporary investments than his predecessors  had to spend in total some years doesn’t have the money for these great ideas for one simple reason:

By the time he gets to the “consultations” he’s already decided where the money is going.

And that’s why the whole exercise is a farce.

You see, a statement of fact is not a criticism.  It’s like unsustainable spending.  Marshall knows it’s a matter of fact.  He just won’t admit it until he has no choice.

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Budget 2010: Slowly the facts emerges

From an interview with the Telegram (not online) here’s a telling little statement from finance minister Tom Marshall:

He said corporate and personal income taxes may be "softer than originally anticipated."

That’s true.  Incidentally he meant the revenue coming from the taxes, not that there were plans to reduce taxation.

Corporate and personal income taxes may not be the only thing that is “softer than anticipated” this year.

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