Better more, and better #nlpoli

The provincial government has a very serious financial problem. 

The forecast deficit for the current year is the second highest on record at $916 million. 

No one knows how big the deficit will be next year,  but with oil prices forecast to stay in their current range for the next couple of years,  odds are very good that the provincial government will turn in a record deficit next year.

That is saying something.  The forecast in 2004,  the first year the Conservatives took office, was for a deficit of $840 million.  Finance minister Loyola Sullivan called it “the largest deficit in our province’s history.”  He was a wee bit off.  The actual accrual deficit in 2003 was $958 million.

Budget consultations and other political insanity #nlpoli

This year it is Charlene Johnson’s turn to host a series of meetings across the province that the provincial Conservatives cynically tout as a way for people to have some input into the provincial budget.

It’s cynical because – as the Conservatives know – the major budget decisions are already made before the finance minister heads to the first of these meetings. They are a waste of time.

The people who show up at these sessions have no idea what the actual state of the province’s finances are. The provincial government hides the real numbers until budget day.   Therefore the people who show up can’t offer any sensible suggestions, anyway.  Instead, they wind up begging like a bunch of serfs for more cash for this and more cash for that, even though the cash isn’t really available.

Could be right. Could be wrong. #nlpoli

If you accept the provincial government’s version of things, spending a half a billion dollars more than you are collecting is a responsible decision.

That’s the headline the government’s communications people put on the news release covering the release of the fall budget update.

And if you look at either the Telegram or the CBC version of the story,  the biggest thing to notice is that the provincial government deficit is $100 million less than originally forecast.

Let’s take a deeper look and see what is there.

The Debt is Passed: Budget 2013 #nlpoli

[Note – see below]

The throne speech promised that the same Conservative financial management that produced the current financial mess would continue and they delivered in Tuesday’s budget.

The strategic problem remains unchanged

The Conservatives will continue to spend billions in one-time cash from oil and minerals.  That’s the structural deficit people have been talking about and the Conservatives have done nothing to change that.

Tuesday’s budget gave us the year-end cash figures for 2012 and the forecast for 2013.  Here’s the chart from Monday’s post on deficits and surpluses that shows spending and the non-oil revenue.  We’ve updated it to include the cash figures for 2012 (actual) and 2013 forecast from the 2013 Estimates.  Remember that the Estimates are presented on a cash basis.

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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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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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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Oil production remains lower than forecast

Provincial government oil production forecast remains way off track.

Budget 2009 predicted oil production would total 98 million barrels in 2009.  In December, the financial update raised the forecast to 101 million barrels.

But as of the end of November the offshore had produced only 59 million barrels and with only four months left in the fiscal year, it would take a miracle to hit the spring projection let alone the December number forecast by the provincial finance department.

Offshore oil production in October 2009 was 32% below the same month in 2008 and November production was down by 28.4%, according to actual production figures from the offshore regulatory board.  BP presented earlier figures in November.

To give a sense of of how far down current oil production is compared to previous years, take a look at this chart that compares April to November for each of the past three fiscal years.  The grey bars are 2007.  The back is 2008 and the red is 2009.

In order to meet the provincial government’s Budget 2009 target, oil production in the last four months of the current fiscal year would have to run higher than April 2009 in each month.

To hit the December projection, production would have to run at levels of about 10.5 million barrels a month, and that’s a figure the offshore hasn’t hit this fiscal year at all. 

Overall, if production is running below forecasts, it will be that much harder for the provincial government to hit its revenue forecasts. After all, even the finance minister admitted in a year end interview that virtually every major sector of the provincial economy – he didn’t really mention oil - was in decline.

“The recession, particularly the way it hit the U.S., impacted their ability to buy products from us and that hurt the fishing industry, that hurt the pulp and paper industry in a major way, and it hurt the mining industry,” the MHA for Humber East told The Western Star.

He said the major losses of revenue from those sectors, combined with losses of personal income tax and sales tax, impacts government’s ability to spend in other areas such as education and health care.

Of course, regular BP readers have a better sense of what’s going on with oil production than the anything the finance minister has said.

And just think about it for a second:  if the finance department’s offshore production forecasts are so far out of whack with actual production, what else in the December forecast was off in a bad way as well?

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If it looks too good to be true…

While gross domestic product in Newfoundland and Labrador is now forecast by the provincial finance department to shrink by 8.5%, finance minister Tom Marshall today forecast he expected to receive $520 million more than budgeted last year in oil royalties.

That’s pretty much typical of the incongruity between what the  “mid-year” financial update said about the economy and Marshall’s prediction of higher than expected revenues.

Here’s a summary of the 2009 economic performance to date in Newfoundland and Labrador, as presented by the finance department:

• Real gross domestic product is now expected to decline by 8.5% compared to 2008.  That’s worse than the 7.7% drop forecast last spring.
• Oil production in the first nine months of calendar 2009 is down 20.6% compared to the same period in 2008.
• Despite that, the revised budget projection is for an increase in oil production to 101 million barrels by the end of March 2010 compared to the spring projection of 98 million barrels.
• The value of oil production is expected to decline by 45% compared to last year.  That’s on a calendar basis. 
• Government oil royalties on an accrual basis is expected to be $1.813 billion, an increase of $520 million over the forecast in Budget 2009.
• The value of mineral shipments is expected to be down by 56% compared to 2008.
• Mining employment down by 9% compared to 2008.
• Paper production is expected to be about 47% lower than in 2008.
• Retail sales and personal income are up slightly compared to 2008.

Some quickie observations:

Apples and oranges comparisons: Most of the economic information presented in the update compares performance over a calendar year while the budget works on a fiscal year. 

To illustrate how this can have a distorting effect, consider that oil production in the first three months of calendar 2009 remained at 2008 levels of 10 and 11 million barrels per month.  However, during fiscal 2009 thus far (starting in April) , monthly production has averaged about 30% below that.  The first three months artificially inflate the average for the calendar year compared to the fiscal year.

Triple the year-to-date oil revenues and then some:  As BP reported earlier, oil royalties in the first half of fiscal 2009 (Apr to Sep) totalled about $488 million.  September’s royalties were 60% below the monthly average needed to hit the spring budget projection of $1.3 billion on an accrual basis.  Overall, royalties are running about 15% below forecast.

The fall update now projects oil royalties at $520 million higher than forecast. That’s 40% higher than forecast, despite the prediction that the value of oil production will be down by  45% and that production will be down by at least 20%.

Oil royalties are function of price and production.  Even if the royalty rate is higher in 2009 than 2008, lower production and lower average prices should produce lower royalties. 

As it is, the revised oil royalty is only 8% below 2008’s figure despite a projected 45% drop in value and a 20% drop in production.

A missing chunk:  On page nine of the budget speech from last spring, then finance minister Jerome Kennedy blamed the deficit on two things:  the impact of the stock market on pension investments (about $380 million) and lost Equalization revenue owing to changes in the formula for 2009.  That part was supposed to account for about $414 million.

There isn’t a single word about the pension plan investments and their current valuation in the update.

Hmmm.

Read the fine print:  While things might just turn out to be as rosy and wonderful as the budget forecast, it might be useful to bear these words in mind.  They come from page five of the budget update document itself:

However, at this time, there are four months remaining in the fiscal year, and there are many factors and uncertainties which may impact year end results.

Uh oh.

This wouldn’t be the first government that blew smoke to try and keep consumer wallets open through a rough patch.  There are plenty of things in this budget update that don’t add up.  Maybe they aren’t supposed to unless you realise that this update was less about the facts and more about the torque.

Whatever happens, we’ll know for sure in the spring.

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September oil royalties 60% below budget forecast average

High prices and better royalty rates on Hibernia didn’t offset oil production declines in September for the Newfoundland and Labrador offshore.

According to figures released to Bond Papers by Natural Resources Canada, Newfoundland and Labrador’s oil royalties for September were $40, 290, 252.18. 

That’s only 40% of the $105 million monthly average needed to meet projections in the spring budget. The provincial government  forecast oil royalties of $1.262 billion for Fiscal 2009, or about $105 million per month.

As reported in November,  figures obtained from Natural Resources Canada showed provincial oil royalties were down almost 60% [on average] so far in 2009 compared to 2008 and were running [on average] 15% below provincial budget forecasts released in March of 2009. [In September alone, revenues dropped to 40% of the average needed to meet 2009 budget projections]

Oil production is down about 29% from last year. September oil production from Hibernia, Terra Nova and White Rose totalled 6,164, 839 barrels of light crude according to the offshore regulatory board.  October production was slightly more than 6.9 million barrels, about the same as May 2009 and continuing the trend thus far for the new year.

If those trends continue for the rest of the fiscal year, oil royalties for 2009 will come in at less than $1.0 billion. Without cuts to spending or increased revenue from other sources, the provincial government will have a hard time not to exceed its record forecast deficit of $1.3 billion on a cash basis.

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[Words and a sentence added for clarity]

How Icelandic are we, 2009 budget version

According to the Premier the relatively high price of oil at the moment is a good thing, with the prospect that it could wipe out the provincial government’s budget deficit. [Update:  an online story via CBC about the Premier’s comments.]

But could it?

Right at the start, everyone should recall that provincial revenues from oil are a function of the price per barrel of oil and total annual production.  The provincial royalty is a percentage of what you get when you multiply how much oil is sold by how much you get for each barrel.

So let’s look at production.

The provincial 2009 budget low-balls oil production.  It hit 125 million barrels in 2008 and while Dominion Bond Rating Service forecast a 15% drop, the provincial finance department forecasts a 21% drop to only 98.5 million barrels.

In the first month of the fiscal year – April – total oil production was slightly more than 9.1 million barrels.  At that rate, the offshore would produce 109.2 million barrels in 2009.

Compared to April last year, oil production is only down about 10%.  That means that the provincial production forecast could be off by more than twice the actual decline. 109 million barrels would represent a 13% decrease from 2008 – right in line with the DBRS estimate.

Then there’s price.

The budget forecast oil at US$50 a barrel on average.  Currently Brent is trading at about US$65 a barrel.

Sounds great, until you factor in the hidden gem:  the relative value of the Canadian dollar.  When the Canadian dollar is weak the provincial government can pick up a nice little premium by selling in American and then doing the conversion. 

At budget time, the Canadian dollar was worth a lot less.  As a result, that price of US$50 a barrel worked out to be around Canadian$60 to $62.50.

Brent crude is currently trading  at Cdn$71.50.  That’s because the Canadian dollar is trading at almost US$0.90. 

If you do the math on that – using today’s Brent price plus the more likely oil production level  - the whole thing works out to roughly $1.5 billion in oil royalties for the provincial treasury.  The budget forecast was $1.262 billion based on a smaller amount of slightly cheaper oil.

Meanwhile, the cash shortfall is $1.3 billion. Oil revenues would have to double, as they pretty much did last year, in order to wipe out the cash shortfall if the dollar hangs around its current treading level.

Even coming up with an extra $500 million or so on top of the extras already attained would mean you’d have to see the price of oil go higher still and the Canadian dollar slide down as well.

That might happen.

Then again, in the current environment, it doesn’t seem very likely.

We’ve been in this sort of dream land thinking before back in the spring when the budget came down. Back then, we used a higher oil production figure and a much weaker Canadian dollar in order to generate an extra $600 million in cash or thereabouts. 

But an extra $1.3 billion? 

Or even $750 million?

That would be pretty hard especially when other commodities like fish and minerals aren’t doing that well either and the forest industry in the province is shrinking faster than the family jewels on a crowd of Scandinavian men running from the sauna into an ice-covered pond.

At the very best, any optimism or pessimism about where the provincial deficit will wind up this year is a wee bit premature.  At the worst, reporting any sort of government speculation about revenues is irresponsible.

After all, these guys sat on a couple of billion in cash they never bothered to mention until this year.  It’s not like the provincial government has a sterling reputation when it comes to disclosing the facts of a matter.

 

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Jerome and his Amazing Technicolour Dream World

For the first time in four years, provincial government oil price projections aren’t lowballed. 

They did manage to lowball production levels but not by much.

There’s no secret stash of cash – like last year’s Equalization for the “have” province – that can emerge to make all the boo-boos go away.  This year is the current administration’s real budget.

And to make it worse, you have to wonder about their math skills.

Oil at US$70 a barrel, and with the Canadian dollar where it is would generate another $600 million in oil revenue above current estimates.

Just to put it in context, oil has spent the past three months at around US$45. The deficit is $750 on an accrual basis, $1.3 billion on a cash basis.

Jerome says that $600 million more would produce a surplus.

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That’s what that noise was…

The giant pop was the bubble that was protecting the province from the global economic meltdown as it burst.

Former finance minister Tom Marshall:

“We have a horrible, global economic slowdown, which appears to be much more severe than people expected,” said Marshall. “We’re seeing job losses everywhere and firms going bankrupt or teetering on bankruptcy. How protracted this recession will be, I don’t know, but it looks like it is going to be severe.

“When times are good, you run a surplus. When they are bad, you run a deficit and spend money. When consumers aren’t spending and businesses are not investing and exports are down, government has to step in and start spending and creating employment. That’s what we’re doing and I’m glad we’re doing it.”

Of course, since Marshall ran cash deficits in the good times, so there’s something there that doesn’t add up.

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Recycled “stimulus”

There is an unprecedented, historic level of money in yesterday’s provincial government pre-budget spending announcement that is recycled cash from last year or money previously committed.

That’s pretty clear if you read comments by former finance minister Tom Marshall in the province’s other daily newspaper, the Western Star:

There will also be $16 million to finish off the new long-term care facility in Corner Brook.
The province is going to spend $50 million in health equipment and another $40 million on maintenance and repairs of current facilities, though Marshall did not have a breakdown of how much of those monies will be directed to Western Health.The new law courts under construction in Corner Brook will receive $7 million so that project can be completed in the coming year, while Sir Wilfred Grenfell College will be getting a share of the $9.4 million the province will spend on new residences at the Memorial University campuses in Corner Brook and St. John’s. The total cost of the Grenfell residences will be nearly $5 million, while new accommodations at the larger campus will eventually cost $67.5 million.

Leftover work from last year, including jobs on the Lewin Parkway and the off-ramp at Humber Village, will be among the $70.7 million o be spent on the province’s roads. Schools throughout western Newfoundland can expect to see some of the $30 million announced for repairs and maintenance  in K-12 schools.

It isn’t clear at this point how much of the money is actually new nor how much will actually be spent.

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Math problems at provincial finance

That 60 cycle hum you hear is not the turbines spooling up on the Lower Churchill.

Nope.

That noise would be the intense spin – torque would be a better word – the provincial government is putting on its infrastructure announcement this snowy Wednesday. 

The reason for the announcement:  the provincial pollster – CRA  - is in the field.  With the nurses taking a strike vote and with a certain amount of anxiety out there about how bad the budget will be, the government party must have felt the need to make it appear that something good was happening in the budget to keep those polling numbers high.

Note the word “appear” in that sentence.

This is all about appearance.  If the provincial government actually wanted to do something, then the legislature would be called back and the new budget would be introduced.  They could run with it tomorrow since the thing is settled and has been for weeks. 

If it wasn’t about appearance, a bunch of cabinet ministers wouldn’t be sent to Labrador to announce things already announced.  The hospital in Labrador West is now officially the most announced project that never appears in provincial political history.  The Lower Churchill still holds the record for most costly non-project.

And if they had been really smart, then no one would have been proudly pointing out that all this was just re-cycling old news, as natural resources minister Kathy Dunderdale did with CBC last night or one of the political gaggle did at the news conference in Goose Bay.

This budget announcement is apparently not about math.

We are told that infrastructure spending will be about $800 million.

We are told it is a record.

We are told that:

The $800 million the Provincial Government will spend on infrastructure in the 2009-10 fiscal year represents a jump of $285 million – well over 50 per cent – from the 2008-09 fiscal year.

Last year’s “unprecedented” infrastructure spending was valued at $673 million.  An increase of “well over” 50% of that amount would put infrastructure spending this year at $1.009 billion.

If $285 million – the size of the increase – is actually more than 50% of last year’s spending, then we have discovered something very interesting.  Despite announcing $673 million in “unprecedented” capital spending last year, the provincial government may have spent a not altogether unusual amount of somewhere around $500 million. That’s about 25% less than announced.

Based on that precedent, capital spending in 2009 will actually be around $600 million, not the $800 million torqued on Wednesday.

And it’s not like this is the first time something coming from provincial finance didn’t add up. Different figures keep appearing from Jerome Kennedy’s department all the time.  Like Equalization.  Numbers magically appeared all through that fiasco a couple of weeks ago that had never been seen before in public, including in the province’s audited financial statements.

Lucky for the finance crowd and their government publicity machine they can still hypnotise some people with the magic of PowerPoint slides.

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The provincial budget update: six points

1.   The long and short of it:  Some revenues are higher than projected.  Spending  remains the same.  The update runs six pages.  Four of them are devoted to a rehash of things we already know and a heck of a low of stroking for supposed prudent fiscal management.  What’s left is pretty thin, at least for anyone who wants to get a handle on.


2.   Missing revenue numbers:  Interestingly the provincial government only mentioned three specific revenue sources which are performing above budget estimates from last spring. Unmentioned was revenue from mineral revenues other than oil.  Last year it was big enough to warrant a mention.  This year:  zip.  Either mineral revenues are on par or down or the government is saving that for the spring to offset some bad news.

3. The political value of lowballing:  Underestimating revenues and overestimating costs is an old trick to make your budget performance look better than it really is.  This year – for the first time in three years – the provincial government’s practice of lowballing oil revenues didn’t really work out as planned.

In prior years they could forecast deficit spending and be reasonably assured oil would perform beyond the expectations.  At the end of the year planned borrowing was replaced with cash spending.  That’s how deficits never really appeared.  It’s also how the Premier could keep claiming that surpluses were being directed to debt reduction and that – as this update claims – there is a magical plan at work which delivers even in relatively bad times.  The faithful sop it up They even go so far as to claim the Premier can’t be blamed for the downturn even though they give him all the credit for the cash rolling in when it rolled in. 

This update gives an excellent example of how to inflate performance by lowballing.  There’s $70 million missing from the spring budget projection for oil royalties.

Okay.  He can’t.  But he also can’t claim the credit for the great times in the past couple of years since he didn’t deliver those either.  The faithful can be spotted by the purple freshie stains on the corners of their mouths.

4.  The extras cash revenues (corrected):   Note that the budget update gives the budget estimate for oil royalties $70 million below the actual number from the Estimates.

	Forecast	Revised forecast	Difference
Oil Royalties	$1.789 billion	$2.202 billion	$413 million
Personal income tax	$674.8 million	$831.8 million	$157 million
Sales tax	$631.589 million	$664.589 million	$33 million
Total variance			$603 million

5.  Surplus or deficit?  This all goes back to an issue raised here last September. Given that the accrual surplus is now revised to be $722 million higher than forecast, there are a few bucks missing from the update.  Even at $722 million in additional revenue, the budget would still be short on a cash basis by $72 million.  Given recent practices, and given that this year there are no anticipated savings through spending cuts, the cash deficit could easily run to upwards of $200 million by the year end.

6.   Prophetic words from last June: 

In order to produce a surplus of the size predicted  - but predicted only in political statements - oil prices would have to continue at double the figure of  $87 a barrel used to come up with the budget.  So far, it looks pretty good for oil to be somewhere over $130 on through the end of this year, but you never know what will happen with oil prices, especially after the American elections in November and the new president is sworn in late in January 2009.

Okay, so at the time, it looked like oil was going to stay high.  And in making the comments, your humble e-scribbler was also pointing to the difference between an accrual surplus – including cash that really isn’t there – and the cash situation which might under certain circumstances require new public debt to make things balance.

The key point, though, is that you never know with oil prices.  Shortly after that post, oil peaked at $147;  incidentally that’s not $145 or $150 as reported in a couple of spots in the news release and update document issued by the provincial finance minister today.  As it turned out, oil prices started falling in late summer and with the credit crunch, the drop accelerated. In the end the provincial government can report an accrual surplus that looks amazing but on a cash basis, they’ll likely wind up having to borrow cash to settle all the accounts.

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The Can-Opener's surplus prediction

Memorial University economist Wade Locke:

"The price of oil has already averaged in excess of $110, $115 per barrel for the year so far, so even if the prices were to fall down to $10 per barrel, they would still meet their budget projections of $87 a barrel," Locke told CBC News on Monday.

"So the forecasts in the budget should still be fine. They should have a budget surplus even bigger than they what they had forecast."

Okay.

Let's see if that works out.

Given:

• The 2008 budget estimates predict oil royalties of $1.789 billion based on an assumed average price for oil of $87 per barrel.
• The 2008 budget estimates forecast a deficit on capital and current account of $414 million.
• The 2008 budget estimates forecast an additional borrowing requirement of $380 million for a combined cash requirement (borrowing) of $794 million.
• For the first six months of the fiscal year, Locke gives the average price for crude oil as $115 per barrel.
• The finance minister forecast a $544 million surplus in public statements and the budget speech, even though that figure does not appear anywhere in the budget estimates voted on by the House of Assembly.
• All other revenues and expenditures remain as projected in the estimates.
• Annual oil production is 111 million barrels.

Therefore:

• In order to attain a surplus of $544 million, provincial oil royalties would have to exceed the forecast by approximately $1.338 billion ($794 million + $544 million);  in total that would be oil royalties at $3.127 billion.
• If oil averages $115 per barrel for the entire fiscal year, the projected royalty would be $2.361525 billion.
• If oil averages $115 for half the fiscal year and $87 for the remaining six months, the total provincial royalty would be $2.05535 billion.
• Budget surplus (deficit) @ $115 for 12 months = ($766 million)
• Budget surplus (deficit) @ $115 or $87 over 12 = ($1.072 billion)

No matter how you slice it, that doesn't look like a surplus.

No matter how you slice it, that doesn't look like a larger surplus than the one supposedly forecast in the budget.

Anyone who wants to explain Locke's figuring or where the Bondable version is off is welcome to do so.  Either add your comment to his post or send it by e-mail and we'll do it for you.

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Budget accuracy: NL consistently strong results

One of the great unfacts that has crept into political dialogue in Newfoundland and Labrador is that fiscal accountability and sound management suddenly arrived in October 2003.

This report by the CD How Institute shows that over the past 10 years, the Government of Newfoundland and Labrador has been consistently accurate in its budget forecasting. The province showed a mean variation in spending changes off just 0.99%, ranking second in accuracy to Quebec.

Some of the biggest variation in forecasting revenues has been in the past two years - FY2005 and FY 2006 - with variations of 5.8% and 15% respectively.

Prior to that the largest variation was 1997-98 when the provincial budget underestimated revenues by slightly more than 10%, and 1998-99 when the provincial governments revenue actually declined. The difference between forecast and actual was -6.32%.

According to the Howe study, the Government of Newfoundland and Labrador is forecasting a 10% growth in spending in FY 2007. That's double the growth in the federal budget and five times the growth in the Ontario government.

Spending growth of 10% is also more than two and a half times the projected real growth in gross domestic product, according to a recent report by Scotia Economics.

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