Harris Centre economic forum: the media coverage

The Telegram’s James Macleod had a decent front page summary of the Harris Centre’s discussion of economic issues facing the province and the subsequent discussion.

The CBC has a super short version that is already bumped off the front page of its website in favour of stories like one on a baby bear in Terra Nova park, a batch of fake 20s making the rounds on the northeast Avalon and an earth-shattering story about two idiots who stole metal for scrap and found out it was worth more than they thought when they wound up in court for the theft.  Talk about if it bleeds, leads.

Anyway, for those in tune with evidently less important issues – how does an multi-billion dollar economic mess compare to two scrap metal dorks? -  Wade Locke’s presentation isn’t on line yet but here is the slide likely to be causing a few stomach’s to turn in knots. 

It’s Locke’s deficit forecast based on current trends and current government policy:

Within a decade the current account deficit will be running at record levels if the current administration carries on with its policies. We can expect more of the same from the incumbents since finance minister Tom Marshall is already trying to pretend that the mess doesn’t exist or that he has things under control. 

Unfortunately for the rest of us,  it does and he doesn’t.

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The Four Horsemen and government finances

Don’t be surprised if the provincial government issues a statement in the near future trumpeting an accrual surplus of several hundred millions.

Sure Tom Marshall isn’t ready to acknowledge what is going on, but it’s pretty hard to avoid making tons of money when those pre-Danny Williams oil royalty regimes meet Brent crude prices that are soaring to more than US$105 million based on Muammar Khaddafi’s willingness to slaughter thousands of Libyans in order to stay in power.

Oil prices and production levels are actually at the level where the Conservatives in Newfoundland and Labrador might produce a cash account surplus as well for the first time in a couple of years. That’s a good thing if only because it means the public debt won’t increase to record levels as it has under the Conservatives since 2003.

The question one must ask as we get closer to a provincial budget for the new fiscal year is how much longer the provincial Conservatives will continue to base public spending on windfalls due to war, famine, pestilence and death?

The Conservative banshees will likely start their usual screeching in the comments section at this point but the facts are plain in anyone’s face.  The Conservatives’ financial “miracle” has resulted not one teensy bit from anything they have done.  The enormous cash flow over the past five years resulted to one extent or another from political instability, economic crisis and all manner of calamities around the globe that drove oil prices to unprecedented heights.  Run those oil prices through the royalty regimes delivered before the Conservatives took power in 2003 and you have more money than the spendthrift Conservatives could actually spend.

Since 2003, the provincial Conservatives, led by first Danny Williams and now Kathy Dunderdale, have deliberately avoided sound fiscal policies.  Finance minister Tom Marshall and his colleagues have refused to create a sovereign wealth fund or to restrain public spending.  They have, in fact, willingly boosted spending to levels even they’ve acknowledged are unsustainable. 

Gross public debt remains at historic levels and, if Marshall is to be believed, there is little willingness around the cabinet table to take the sort of measures any prudent government would be doing in the face of dwindling oil production.  In other words, there’ll be no investment fund of the type found in other, responsibly run places, at least, not until Tom takes a hike to enjoy his fat pension on a Bermuda beach somewhere.

Now none of this actually comes as a surprise to the Conservatives.  Premier Kathy Dunderdale is aware enough of declining oil production – and hence revenue – but that seems to be only when she is faced with a reporter’s question about spending public on something  - like municipal bus services – that she obviously isn’t keen on.

But on things she wants, like Muskrat Falls, there is evidently no limit to Dunderdale’s willingness to spend other people’s money by increasing public debt and doubling electricity rates in the province.

In a few weeks’ time, Newfoundlanders and Labradorians will find out what Kathy Dunderdale and her colleagues plan to do with public money for the foreseeable future. Let’s see if Kathy Dunderdale defines her premiership by changing the pattern of financial imprudence she and her colleagues have maintained until now.

Odds are against any change to fiscal responsibility by the provincial government.  For starters we are in a pre-election period. And when that is done, we will still have the unresolved Conservative leadership.  No one will be willing to take any steps to turn off the money spigots when votes are at stake.

Just think of political expediency in a patronage-riddled political culture as the fifth horseman.

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Imagine if they were fiscally responsible

Feast your eyes on labradore’s latest offering about public debt in Newfoundland and Labrador.

The only people left who think the current administration (since 2003) acted and are acting in a fiscally responsible manner are those who just refuse to see the obvious.

Labradore offers this projection of the provincial net debt if a quarter of oil revenues had gone to actually paying off debt over the past few years.  The light coloured bits are what would have disappeared.  The dark green are what would have remained. The two together are what the Conservatives actual record looks like from basically doing nothing except paying off what came due.

Never Read Stuff Late at Night Update and Correction:  The charts are based on the assumption of taking 25% of the windfall oil revenues for spending and 75% for debt reduction. That's what happens sometimes when you read things late at night.

It actually doesn't change the overall thrust of this post or labradore's original, though since the charts illustrate what an aggressive debt reduction approach could have achieved while at the same time fueling significant increases in public spending.

Consider this to be the complete opposite of the Williams and Marshall approach in which they basically did shag all to reduce the province's debt burden to any meaningful degree.

*original continues*



And the share of the public debt borne by each man, woman and child in the province?

In the cleverly colour-coded chart you can see the blue line – what the Tories did – and the red line representing what might have been, had the current administration done as labradore and a few other brave souls recommended.



Odds are pretty good that a government with the fiscal track record shown in this chart could actually raise the cash on its own to build a viable Lower Churchill project.  On its own, that is, which would be in contrast to going cap in hand to Uncle Ottawa looking for a gigantic multi-billion dollar handout. Like say both Danny Williams and his hand-picked successor have been doing.

There’s a provincial government that is genuine in its aspirations and one that can be legitimately proud of the efforts it has made to ensure Newfoundlanders and Labradorians live in a province that is strong and fiscally sound.

And then there are the people who talk about legitimate aspirations but who fail repeatedly to embody them, let alone achieve them.

Just for good measure, let’s give labradore the final words on this.  They are all too accurate:

There was, of course, nothing responsible or prudent about Danny Williams’ tenure as Premier, and nothing, other than name, that was conservative about it. He chose a different track. 

That is why a government that collected over $9-billion in oil revenues during its tenure still presides over a $9-billion net provincial debt. 

And that is why the provincial net debt per capita this fiscal year was over $17,000 and rising, when in the alternative universe it would have been $7,000 and falling, and falling fast.

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We are all Newfoundlanders

The global economic problems are weighing heavily on some brows, so heavily in fact that some are musing on the idea that “nous sommes tous des terre-neuviens”.

We are all Newfoundlanders, via le monde.

Quand on sait que les Chinois et les Japonais détiennent respectivement 883 et 865 milliards de dollars de bons du Trésor américains, on n'ose à peine imaginer ce qu'il resterait de la paix mondiale si les Etats-Unis faisaient défaut sur leur dette. Ou la réaction des investisseurs étrangers qui possèdent 70 % de la dette publique française si celle-ci n'était plus remboursée. On se sentait déjà un peu irlandais ou grecs. On se sent un peu terre-neuviens aussi.

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“Get fiscal house in order” first: analyst

An analyst with the Atlantic Provinces Economic Council told a conference in St. John’s that the provincial government  “has to get its fiscal house in order” before it makes an investment in any version of the Lower Churchill energy megaproject.

Fred Bergman said the province’s net debt to gross domestic product ratio remains among the highest in Canada at 41%.

Bergman is quoted by the Telegram [page four story, Wednesday November 3, not on line] as saying:

“Get your fiscal house in order, get your debt-to-GDP ratio down, get your budget balanced and then you can afford to tackle something like that.”

The Williams administration ran a half billion cash deficit in 2009 and budgeted for a $900 million cash shortfall in 2010.  Budget projections released in spring 2010 do not include any forecast for balanced budgets.

Finance minister Tom Marshall has previously consistently rejected balanced budget legislation.

In its various configurations, the Lower Churchill project could cost anywhere from $6.0 billion to $14 billion.

The following charts show the provincial government’s liabilities and net debt.  The vertical axis is in millions of Canadian dollars.

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Related:  “The Fragile Economy: staying the course”

A Crown corporation by any other name

A company that has received almost $3.5 million in federal and provincial government money since 2006 is getting another $300,000 from the federal government to support its production.

Dynamic Air Shelters will receive another $300,000 for “research, and development, engineering and marketing initiatives.”

That’s in addition to the $575,000 the company has received over the past two years for research from the federal government.

Since 2008, the company has received more that $2.0 million in federal and provincial government money to support its business operations.

A Crown corporation by any other name would not  be sucking so much public money.

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Significant Digits – health care edition

In 1995, the provincial government spent slightly less than a billion dollars on health care. 

That was 26.4% of the provincial budget that year.

In 2010, a mere 15 years later, the provincial government is spending roughly 43% of the budget (not including capital works) on health care. 

That figure drops slightly – to 38% - if you add capital spending but that's only because of the disproportionate amount of spending on capital works not related to health care. 

In 2008, the provincial government spent 43% of the budget on health care.

That’s on par with spending in Quebec, for example, but the rate of change has been much greater in Newfoundland and Labrador than it has been in Quebec. Health care spending in Newfoundland and Labrador has doubled since 2003; in Quebec, health care spending grew 33% between 2003 and 2007.

Wait.

It gets better.

With health care spending at about $2.7 billion, that works out to be the equivalent of 12% of the value of all goods and services produced in the province  - the gross domestic product or GDP - in 2009.

According to the Organization for Economic Co-Operation and Development, the Untied States spent 16% of its 2007 gross domestic product on health care.  That’s the most recent year for which the OECD supplies statistics online.

Canada as a whole spent 10% of its GDP on health care.  That was slightly behind Germany and around the same amount as Austria and France. But the majority of countries in the comparison of Europe and North America spent less than 10% of GDP on health care.

Just to be sure, in 1995, Newfoundland and Labrador spent about 10% of its GDP on health spending.  

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Incidentally, those 1995 figures are from the Strategic Social Plan consultation paper.  It was supposed to have been released in early 1996 but circumstances prevented that from happening. Since copies are scarce – they were rounded up and shredded on orders from on high – your humble e-scribbler will scan his and start posting it very shortly.

The Money Program

Within the past 12 months, federal and provincial government sources have poured $2.0 million into a building expansion at Dynamic Air Shelters and to unspecified research projects the company is running.

The most recent injection – this time from the provincial government – came last week.

That brings the total amount of public cash in this private company to slightly less than $ 3.5 million in the four years since the company relocated from Calgary to Grand Bank. That doesn’t count what the company received as a result of EDGE status.

 

Date	Description	Amount (Cdn$)	Type
19 Mar 10	12,000 square foot building expansion plus new equipment	725,000	INTRD - unspecified
17 Jun 09	Research	50,000	NRCC - contribution
17 Jun 09	Research	30,000	NRCC - contribution
12 Jun 09	Research	30,000	NRCC - contribution
19 May 09	Research	465,000	NRCC - contribution
16 Apr 09	Building expansion plus new equipment	500,000	ACOA – interest free loan, Business Development Program
		200,000	Grand Bank Development Corporation loan
06 Nov 08	6,000 square foot expansion plus 30 + jobs	500,000	Business Oil and Gas Manufacturing Services Export Fund
27 Jun 08	Salary subsidy – hire and train 18 employees	180,000	INTRD - unspecified
01 May 07	Loan – unspecified purpose	250,000	INTRD – SME Fund
20 Dec 06	Prod. “efficiencies” and employee trg	20,000	INTRD
26 Jun 06	Construct oil industry shelters	499,926	ACOA – “provisionally repayable contr”
12 Jun 06	Hire marketing manager	50,000	ACOA - contribution
SUB-TOTAL	Provincial Federal	1,675,000 1,824,926
TOTAL		$ 3,499,926

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Net debt and liabilities

In the next of this series of snapshots of the provincial government’s financial state, let’s take a look at few more charts.

First, there’s net debt.  That’s the sum of assets less liabilities.  This table was taken from data compiled by RBC economics from provincial budget documents going back to 1981. The scale on the left is measured in millions of Canadian dollars.

That big jump in 1993-1994 can be directly attributed to changes in federal transfers instituted to deal with the federal government’s financial problems and the recession which had begun three years earlier.

The jump in 2003 is one your humble e-scribbler can’t readily explain and there seems to be some discrepancy in the government’s financial statements.  RBC has used the second set of figures but there seems to have been a revision done in 2004 to the figures for the previous year.

The big drop over the two years between 2006 and 2007 is attributable to one thing and one thing only:  a doubling of the provincial government’s financial assets, basically represented by temporary investments. That’s all oil royalties flowing from  deals struck before 2003.

So when you see the provincial government crowing about debt reduction, they are really talking about the increase in cash they have, not the real reduction in liabilities. There is $1.8 billion in temporary investments held by the provincial government directly and another pile of cash and on-financial assets in various agencies and Crown corporations that brings the total assets up to $4.4 billion.  The $12.4 billion in liabilities minus the $4.4 in assets gives you the current net debt of $8.0 billion.

That’s clear from the second chart which shows only the liabilities as presented in the Public Accounts from 1998 to 2008.

The dip in liabilities in 2007 into 2008 comes from a drop in the unfunded liability in public sector pensions.  That number was cut in half by a combination of spending by the provincial government starting under Grimes and continuing under Williams.  But the biggest part of the drop is directly attributable to the $2.0 billion one time payment from the federal government in 2005.

Now some smarty-pants will notice that there hasn’t been a huge drop since 2005 that would equal the $2.0 billion plus a few more contributions that brought down the unfunded liability.   Well that’s because there have been some other liabilities incurred since 2005, like some new borrowing.  Overall, though, there has been a reduction in the total liabilities with the biggest reduction being the change in unfunded liabilities. 

Incidentally, that pension liability is still there but there is now cash to deal with it. 

Now as a last chart, let’s take a look at the net borrowings numbers.  We looked at the net borrowings per capita, but let’s look at the actual net borrowing figures for the past decade. Remember that  net borrowings are the total amount borrowed less any money set aside to pay the debt when it comes due.

Net borrowing is about a billion dollars higher than it was a decade ago.

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AIMS confirms the population trends

The Atlantic Institute for Market Studies today released its updated 1998 demographic study for the Atlantic provinces. 

Not surprisingly they confirmed the demographics trends for this province over the next three decades that have been known publicly since the early to mid-1990s in this province.

"While slower growth and aging affect the labour force, and hence a region's ability to generate output and income, they also affect virtually all other aspects of the economy. They affect patterns of saving and household consumption, and hence investment. They have differential effects on sales, production, and investment levels in different industries, and their impact thus falls unevenly on different areas within a region. They affect the tax bases from which provincial governments must draw revenue, and they affect the demands for government program expenditures. Work carried out in other contexts suggests the feasibility and importance of anticipating the effects of population change on government expenditures."

Those trends and the financial implications for government are nothing knew for regular Bond Papers readers.

This sort of information is one of the reasons why this corner of the Intern long ago branded government spending as unsound and unsustainable.

It just took them three years to figure it out.

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Unsound financial management, the stunning Oram admission

In Budget 2009, we invested $2.6 billion in health and community services.  This is no doubt a significant amount.  This represents a billion dollar increase in the past five years.  While we would like to do everything and meet every demand, that investment is simply unsustainable.

Paul Oram, Minister of Health and Community Services, September 21, 2009 [video file]

Note the date.

Health minister Paul Oram admitted today that the provincial government’s financial management since 2003 has produced a level of government spending that is - in his words -  “unsustainable.”

That is not just Paul Oram’s word.

His remarks were approved at the highest level.

That word  - unsustainable - is the word that the Premier’s Office chose to describe the financial state of the provincial government.

Until now, the Williams administration has prided itself on exactly the opposite. This is a remarkable admission for the Williams administration, an administration that has prided itself on what it claimed was sound management of the public treasury.

Regular readers of Bond Papers have known it for some time.

The earliest use of the word “unsustainable” in connection with provincial government spending was 2006:

What no one knew was that oil would hit US$70 a barrel and the cash would be pouring in at a rate no one in the province had ever seen before. That allowed Danny Williams to avoid making a whole bunch of good decisions and to crank up spending to unprecedented and, and in light of the economic slowdowns, likely unsustainable, heights.

The word turned up again a few months later in a quick look at the 2007 budget:

The current and forecast spending increases are based on optimistic projections for the price of oil in the medium term. Any downward trend in commodity prices (oil, minerals etc) will quickly make the consistent spending increases since 2003 unsustainable. Fiscal reality in those circumstances - taking less money in than is flowing out - would require program cuts, job losses and/or tax increases to correct.

Take a second and go read that post.  You’ll find the “unsustainable” again:

That level of per capita spending [second only to Alberta] is unsustainable in the long run. As a recent Atlantic Institute for Market Studies assessment concluded:

“If the province fails to reign in its whopping per capita government spending (about $8800/person [in FY 2006]) and super-size me civil service (96 provincial government employees /1000 people) it will quickly erode any gains from increased energy revenues.”

That is exactly the situation Paul Oram described today.

Look through Bond Papers and you will see repeated warnings about the unsustainable growth in government spending since 2004/05. 

This is not an exercise in “I-told-you-so”;  let’s clear that out of the way at the start.

This is about something much more significant.

Point One:  The issues are not new and the implications of the issues aren’t new.

Go back further than 2006.

Go back to the early to mid 1990s and you will see forecasts that showed the demographics in the province for the time period we are currently in and that mapped out the implications for health care costs.  Some of those same ideas turned up here in several posts throughout 2007 and 2008 that discussed the very serious financial state facing the provincial government.

Point Two:  Fail to plan;  plan to fail.

The current situation is a direct result of a series of short-term decisions made by the current administration since 2003.  The short-term spending decisions took place in every aspect of spending;  health care just happens to be the one place in the budget where the demand for more spending is greatest and where the implications of spending are also proportionately great..

How do we know the decisions have been made on an ad hoc basis?

Well, the indicators are littered throughout the correspondence released today by the provincial government.

For starters, just look at the dates on the e-mails to the regions.  The provincial government only settled on its spending allocations in late February and even then, the decisions were preliminary.  

Since 2003, the budget process has slipped further and further back in time such that crucial decisions – like gross spending – are not made until a few weeks before the end of the fiscal year. The reality of these letters suggests that budget decisions were not made until well into the current fiscal year. 

Throughout the 1990s and into the early part of this century,  the big picture spending decisions were made before Christmas.  By the time late February rolled around, the individual line items had been settled such that there was very little to decide.  In those days, the only adjustments that came after February would be cuts based on any changes to federal spending.

But in a provincial government where cash hasn’t been an issue, there is really no reason why the annual budget process should be so far out of whack that major budget decisions are still not settled four weeks before the end of the fiscal year.

Secondly, notice that the direction from the department to the regions is simply to freeze spending at 2008 levels.  That’s a short-term decision if ever there was one, not the sign of a decision taken within the context of a longer-term plan.

Thirdly, take a look at the list of options offered up by the boards.  In Central, there is a wide and unconnected list.  On  the one hand there are major program shifts.  On the other, there is an inconsequential cancellation of a single position for a few thousand dollars.  In Western, the increased costs forecast include substantial amounts that have to be annualised.  That is, the initial amounts increase over time as with any program spending. 

None of this is a sign of planning either at the regional or provincial level.  Rather it suggests a series of ad hoc decisions being made in response to ad hoc direction from central authorities.  As can be seen particularly in the letter from Western region and Labrador-Grenfell, significant new projects were started in 2007 and 2008 which need to be continued.  Yet, in preparing for 2009, the long-term implications of these projects are called into question by a predicted downturn in the economy.

In truth, this inconsistent management situation matches up with what we have seen from the provincial government across the board.  Capital works projects take inordinately long times to get start.  Significant legislative measures get lost for upwards of two years and more before they are implemented.   All the delays cost money. 

Point Three:  The solution cannot be more of the same.

One of the most obvious implications of analysis done for the Strategic Social Plan approved by cabinet in December 1995 was that government needed to fundamentally change how it delivered some services if it was going to balance the demand with the ability to supply.

Unfortunately, one of the first acts of the Tobin administration in 1996 was to scrap the SSP and replace it with a pale imitation. Gone were the needed reforms.  What has occurred since 2003 has been a continuation of the situation post-1996, with predictable results.  Until now, the Williams administration has steadfastly refused to acknowledge it faced a very serious problem.

But acknowledging that a problem exists is the first step to setting things right.

With all that as the basis, the next few posts will lay out some ideas for producing fundamental changes aimed at providing a financially sound future for the province.

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Verbal tics (5) and wandering into a math minefield

Two things stand out from this scrum by the Premier and finance minister a little over a week ago. [CBC video link: “Premier Danny Williams and Finance Minister Jerome Kennedy respond to the latest from the nurses union. The union said Friday that it would not return to negotiations until its strike vote is completed.”]

First, Danny Williams utters only 11 of his now famous “you know” verbal tics in the entire nine minute scrum.  He racks up a mere four in the first two and a half minutes and only hits 10 by the end of four minutes.

Either he’s much more comfortable with this subject – the nurses’ labour negotiation – than he was with other subjects or he’s been doing some anti-tic practice in the past couple of weeks.

Second, finance minister Jerome Kennedy gets himself into a bit of a pickle when he brings up the projected deficit.  He puts the shortfall at about $500 million based on assumed production levels and assuming CDN$50 per barrel for oil and then adds on the $400 million from loss of the Equalization option.  We’ll grant him that even though it’s a bit of a fiction.

Then Kennedy starts down the dangerous road, mentioning the need to allow for “growth”.

How much growth?

Six per cent.

6%.

Or put in other terms about six times the rate of inflation.

That’s pretty typical for an administration that has been known to ratchet up spending by about 14% annually in some years.

So even with oil prices down, mines in limbo and mineral revenues down drastically, a thousand people out of work in central Newfoundland who knows what else, the government is actually planning to increase overall spending in 2009 by six per cent.

That alone would whack $400 million or so onto the deficit all by itself.

Looks like all that the federal changes to Equalization did was take away the convenient federal transfer that would have covered some of that planned unsustainable increase in public spending. Now they just have to stick it on the provincial Amex card.

But still, if you look at where Kennedy headed as he wandered into that mathematics minefield, we are looking at government booking a $1.2 billion deficit this year, the largest in the history of Newfoundland and Labrador, before or since 1949. 

In fact, in one single budget, these guys sound like they are going to add more debt to the shoulders of Newfoundlanders and Labradorians than the entire debt millstone that sank the country in 1933-34.

If you go back and look at the assessment by PriceWaterhouseCoopers in 2004, the projected deficit for next year – based on the finance minister’s own numbers – will look worse than anything in that document.

That probably explains why Kennedy’s voice trails off at the end of his discussion of the coming deficit.  he realised what he’d said.

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