Financial Fustications #nlpoli

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

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

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

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

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

All around in circles #nlpoli

Going around in circles must be frustrating.

Plummeting crude prices have dropped refining margins to negative numbers and so it isn’t surprising that Come by Chance refinery announced Sunday it is shutting down operations for upwards of five months.

The official excuse is the pandemic but the real reason is economics. There’s no point in running a business that isn’t making money.  And you cannot make money in a global market where demand for petroleum products has dropped like a stone.

The same economic reality that is hitting the oil industry is hitting governments in provinces that depend heavily on oil royalties.  In Alberta, Western Canada Select was trading at less than five Canadian dollars a barrel on Friday. 

According to the National Post, the provincial government estimates that every dollar in crude prices costs the Alberta government $355 million in lost royalties. Economist Trevor Tombe estimates the drop in crude prices thus far has cost the Alberta government about $5 billion in royalties.

Newfoundland and Labrador is in worse shape.  Going into what is now the crisis year of 2020, Dwight Ball’s Liberal administration forecast as deficit of almost $800 million.  Last Thursday, the provincial legislature approved government requests to borrow almost $3 billion dollars directly or through the provincial hydro corporation.  Finance minister Tom Osborne told reporters outside the House of Assembly he had no idea how big the 2020 deficit would be.

Bank of Canada to help GNL make payroll #nlpoli

Bank of Canada
234 Wellington St, Ottawa

The Bank of Canada announced today that it will purchase up to 40% of money market securities with terms to maturity of 12 months or less that are  issued directly by Canadian provinces.

The Bank of Canada will make the first purchases on Wednesday, 25 March 2020.  The purchases will include treasury bills and short-term promissory notes. The Bank may adjust the percentage based on markets.

The program – called Provincial Money Market Purchase (PMMP) – will give help to all provinces.  It will be especially welcome news for the Government of Newfoundland and Labrador, which relies on short-term debt to fill in gaps in its cash flow. 

There is a relatively limited pool of capital for the provincial government anyway.  Its relatively low credit rating can make it harder for the government to borrow money at rates it can afford.  For about six months in late 2015 and early 2016, the provincial government came close to being unable to meet payroll due to a shortage of capital in the markets and uncertainty in the markets about the intentions of the provincial government after the 2015 general election.

Borrowed Money and Borrowed Time #nlpoli

Tom Osborne was in Ottawa on Tuesday with his fellow finance ministers trying to squeeze some extra cash out of the federal government. 

The wealthiest provinces in Canada – Alberta,  Saskatchewan, and Newfoundland and Labrador – are looking for some changes to the Fiscal Stabilization Program that would give them extra cash.  They’ve given up on changes to the Equalization program since it is intended to help poorer provinces deliver essential services at roughly comparable levels of taxation. 

FSP “enables the federal government to provide financial assistance to any province faced with a year-over-year decline in its non-resource revenues greater than five per cent.”

Provinces may submit a claim to the Minister of Finance as late as 18 months after the end of the fiscal year in question or may also submit a claim for an advance payment based on as few as five months of data for the fiscal year.

The program doesn’t compensate provinces for losses due to changes in provincial taxation rates. A drop in resource revenues is taken into account only if and to the extent that the annual decline in revenue exceeds 50 per cent.

As Osborne’s financial update for 2019 indicates, though, a bit of extra federal cash won’t fix the problems Osborne has.

No change in the weather? No change in we. #nlpoli

The problem we have is not a lack of options and opportunities to sort out the government finances ourselves.  The problem facing Newfoundland and Labrador is that the leading people of the province, not just the politicians but all the leading people,  don't have the stomach for making the kinds of decisions needed. They don't even want to talk about sensible things. They talk about foolishness like Equalization or fight against imaginary "austerity" instead.

SRBP, "Sovereignty",  January 2017

Lately, Alberta economist Jack Mintz likes to remind Canadians that Alberta is pissed off with the federal government.  The Alberta government is running massive deficits but Mintz thinks Ottawa is to blame, not, you know, the provincial politicians who actually made the decision to spend more provincial tax money than the provincial government takes in.

Mintz turned up in the Toronto Star and CBC Radio last week pushing Ottawa to bail out  Newfoundland and Labrador.  He’s hooked up with a shadowy new outfit calling itself the Schroeder Institute that also launched itself last week with a campaign to get Ottawa to funnel money to Newfoundland - as Schroeder’s Twitter feed keeps calling it – to stave off financial catastrophe in the province.

Then local musician and business owner Bob Hallett took 2,000 words on CBC’s local website to deliver the same message:  Newfoundland’s financial mess is Ottawa’s responsibility to clean up.

That’s a wonderful sentiment sure to get lots of support from people in Newfoundland and Labrador who are worried about their future.  Sadly for those people, Schroeder, Mintz, and Hallett rely on a string of old fairy tales that have been long debunked – not to mention stuff that is just wrong – to make their case. They also are a reminder that wisps of air and pixie dust are a piss-poor foundation for successful policy against very real problems.   That is, after all, how Newfoundland *and* Labrador got into its current mess in the first place.

Osborne whistling past financial graveyard #nlpoli

Moody’s delivered a clear and serious message to the Government of Newfoundland and Labrador on Wednesday night by lowering the government’s credit rating.  The credit rating action came after a series of consistent warnings by Moody’s since it last lowered the government’s rating of credit-worthiness in 2016.

Wednesday’s downgrade suggests that Moody’s has doubts the provincial government can hit its target of balancing the provincial budget by 2022.  While Moody’s changed its trending to stable from negative,  bear in mind that Moody’s rating period ends before the government’s budget period expires.  It doesn’t mean – as both finance minister Tom Osborne and NDP leader Alison Coffin suggested on Thursday - that everything is fine.

In a news release issued on 24 July 2019, Moody’s cited three major reasons for the downgrade:

1. “Newfoundland and Labrador's elevated debt and interest burdens”, 
2.   “continued expectation of material consolidated deficits over the next 2 years”, as well as
3.  “heightened credit risk stemming from the large debt level and weak financial metrics of Nalcor, the province's wholly owned utility, which raises the likelihood the province will need to provide financial support to, or assume debt service from, Nalcor.”

Finance minister Tom Osborne dismissed the downgrade, telling reporters that the downgrade was “not a reason for alarm” and “nothing to be alarmed about”. Osborne said lenders were not surprised by the action, which would be true since both the warnings from Moody’s and the province’s failure to heed them have been well known for two years.

Osborne *is* whistling past the financial graveyard here as he responds to the short-term political imperatives of his own party as opposed to the longer-term interests of the province.  As SRBP noted in January, the provincial government abandoned its deficit plan from 2016 within 18 months of starting it. The spring budget understated the government’s financial state.   

The motivation was purely political just as the reaction to Moody’s is political.  “If re-elected,” SRBP noted before the May election, “Dwight Ball is unlikely to make any changes to the government’s current trajectory unless forced to do so. The members of the Liberal caucus, primarily interested in securing their pensions and possibly becoming ministers in a post-Ball Liberal administration, would have no interest in doing anything that would jeopardise their political future.”

More beige than beige #nlpoli

The Premier had a carefully rehearsed message when reporters asked him on Thursday why he had appointed everyone in cabinet back to their old portfolios despite an election that had reduced his party to a minority government.

A cabinet of "experience, consistency, and stability,"  Dwight Ball called them.

He used the word "experienced" a couple of times and emphasised the word "stable" as he finished the answer to one question.  You can find a bit of Ball's scrum with reporters at about the 42 minute mark of CBC's Here and Now broadcast. NTV's story got the "stability" message loud and clear.

The election result was a shock to many people.  People can debate what it meant that voters didn't endorse any one party to have a majority in the legislature.

Ball has a political problem even if he is in heavy denial about it but all the talk about experience and stability wasn't about dealing with a political problem.  Voters aren't panicked by the minority government.

Ball was dealing with a financial problem.  His plans depend heavily on the ability to borrow a couple of billions dollars to make his budget work.  Ball will have a much harder time borrowing money if the bond-rating agencies take a dim view of his government's ability to manage public finances in the wake of the election.

Deficit *is* higher than previously announced #nlpoli

The House of Assembly will have to deliver a budget that keeps access to new public debt for the foreseeable future. The politicians must satisfy the bond-rating agencies, not the voters. 

Parties don't matter.  Ideologies don't matter.  Voters don't matter.  

That is the essence of politics in Newfoundland and Labrador in the early 21st century.

Anyone who knows Dwight Ball knows that he does not make simple mistakes with numbers.

Yet, the official explanation is that he made a simple mistake with numbers on Sunday's Issues and Answers when he said the deficit for the current year is between $800 and $900 million dollars. SRBP pointed out his comments on Tuesday.

As NTV's Michael Connors reported first via Twitter and later on the NTV Evening News,  Premier's Office and finance department officials claim that the Premier's comments "were actually looking ahead to 2020-21, which has a projected deficit of $796 million."  The deficit projection for 2019 remains at $577 million, according to officials.

Deficit $250 - $300 million higher than announced before election according to Premier #nlpoli

In the episode that aired on 26 May 2019, Premier Dwight Ball told NTV's Issues and Answers that the deficit for the current budget is between $800 - $900 million.

"Are you prepared to make any specific changes to the budget in order to get their support?" asked Mike Connors.

"I think this budget is the one we ran on... everyone understands this budget is between an 800 to 900 million dollar deficit..."

Minor problem.

When finance minister Tom Osborne delivered the budget on April 16,  he confirmed that the deficit in the budget the Liberals ran on was $575 million, once you took out the payments from the Hibernia Asset-Backed Dividend Agreement.  That's the figure finance officials gave during the budget lock-up to media and other groups.

The Financial Reality of Election 2019 #nlpoli

The financial reality confronting any administration after May 16 is the same regardless of which party wins the election. 

The government is unlikely to balance the budget in 2022, regardless of who wins the 2019 election. 

In 2019, as in 2015, the last government budget before the election did not accurately describe the government’s current or likely future financial position.  All three parties did not make this an election issue in 2015 and have ignored the government’s financial situation in 2019. 

The governing Liberals are running on their current budget, which is included in the campaign platform. They apparently have no new spending plans beyond the current budget. The Conservatives cost their plan at $254 million.  These promises must be assessed against the financial realities of the provincial government.

The Financial Situation

We can accept the government forecasts of revenue for what they are although there are some issues, as noted below.  We must add the following expenditures to the government's projected spending in 2020 and beyond.  These additional expenses are why it is highly unlikely the government will balance the books in 2022.

Budget 2019 - revised trends #nlpoli

Budget 2019 was an election budget in the sense it contained a lot of little goodies, but there was nothing to get overly excited about.

While everyone else is focused on the shot-term,  the long-term trending contains more interesting tidbits.  The following slides update the post from Monday.

Income versus Spending

Budget 2019 forecasts cash spending (capital and current) of about $8.0 billion, about $200 million above the 2018 actual spending.

Budget 2019 Context #nlpoli

Most of the commentary about Budget 2019 on Tuesday will be focused on the short-term.

Here are some slides that show longer-term trending.  We'll update them later on with the Budget 2019 figures.This is the sort of stuff that bears watching especially since the announcement of a new federal transfer payment came with the unexplained claim that it will magically reduce public debt and return the government to surplus over night.

Election year a time for serious issues #nlpoli

This originally appeared in The Telegram, 30 Jan 2019.

Budget consultations are not the place for serious discussions of government finances at the best of times but in an election year, the usual charade becomes something else again. 

This year, people lined up asking a government that is the better part of a billion dollars short on its budget this year to spend even more money that it doesn’t have next year.  There are the usual cries from the usual special interests to hire more of their members but even groups that two years ago were calling for drastic action to curb spending are now sticking their hands out toward the government election-year goodie bag in hopes a few treats.

For its part, the government is playing along.  There will likely be a tax cut this year and a few other bits of retail politics. But what you won’t hear about is that the government probably won’t hit its target of delivering a surplus budget in 2022.  That is a major problem. There are three reasons for it.

Praying for a miracle #nlpoli

People are talking about austerity but the simple truth is the people talking that way have a vested interest in exaggerating what is going on in the provincial government.

Yes, we *are* in a very dangerous financial state.

But... the provincial government is doing the bare minimum to keep the creditors happy while waiting nervously for oil to come back​.

In the meantime, there is no austerity and anyone who says otherwise is either ignorant or a liar. 

Some folks are looking at the price of oil and get excited over the teensiest of changes in the price per barrel.  They are missing some simple stuff, though, and at the start of the New Year, it is worthwhile for us to take a quick refresher in basic oil royalty math.

Things are THAT bad #nlpoli

David Thompson is an independent economist in the same way that Jerry Earle and Wayne Lucas are independent human resource consultants.

But the problem isn’t that CBC couldn’t make a factual statement in the first three words of a news story.

Nor is it a problem that Thompson recently visited the province at the expense of a public sector union and met with the Premier to offer some helpful “independent” advice.

No.

The problem is that Thompson simply didn’t know anything about the province and the state of the government’s finances.

Newfoundland government finance, 1832 to 1949 #nlpoli

Before Newfoundlanders stopped governing themselves in the early winter of 1934, they’d run a sometimes arduous course.

Newfoundland gained a limited form of self-government in 1832 and in 1855 gained Responsible Government.  That gave control of  virtually everything except defence and foreign policy to a cabinet made up of members of the elected assembly and the appointed upper chamber of the legislature. 

By the 1880s,  the government wanted to expand the economy beyond the fishery.  They started a railway project to open up the interior of the island and the western coast, much the same way that the Americans and Canadians had used the latest technology – the railway – to expand to their west.

The Endless Supply of Sacred Cows 2015 #nlpoli

On the first day of the session in the House of Assembly, the finance minister tabled an interim supply bill for slightly more than $2.7 billion.

Supply is the word the use in the House of Assembly for money the government will use to run things. Interim supply is an amount to tide things over from the start of the new fiscal business on April 1 until the formal budget bill gets passed sometime later on.

The size of the interim supply bill is a pretty good indicator of how much money the government will want to spend over the whole year.

The Elephant in the Room, the Astigmatic Seer, and other horrifying budget tales #nlpoli

Has anyone noticed a small problem in all the discussions about next year’s budget?

On Point’s David Cochrane had both NAPE’s Carol Furlong and the Conservative’s pet economist Wade Locke on the show to talk about the next budget.  Carol was warning against cuts.  Locke was talking about a request by Tom Marshall last year to reform the provincial income tax system. Locke and his students – are busily working them up, in close co-operation with the provincial finance department.

Can you see the elephant in the room?

Double-down Locke #nlpoli

“I didn’t see this coming,”  Memorial University economist Wade Locke told the Telegram’s James McLeod the other day. Locke was talking about the dramatic drop in oil prices over the past week and a half.

The day before, Locke was on VOCM’s morning talk show dismissing this low oil price stuff as just a passing thing.  No biggie.  And while everyone else is figuring the government is headed farther up a financial shit creek of Amazon proportions, Locke was absolutely confident that prices would go back up and all would be right. 

Sure, government might have to do some trimming, Wade offered, but they should do it gradually over time.  Like losing weight, he said.  If I told you that you had to lose 10 pounds, it would be hard to do it quickly.  But over time, much easier to do.

There’s something truly laughable about Locke’s metaphor because basically Wade is to sound management of public money what a Double-Down from KFC is to heart-smart nutrition.

The Whizzo Quality Assortment #nlpoli

On the outside, the spring budget for 2014 looks like a delicious assortment of goodies for everyone.  You can tell it is delectable because everyone is shouting for joy and drooling over their good fortune.

There is not a single group who have had their hands out for government money that did not get something. And they are telling anyone who will listen just how happy they are. 

Once you bite into one of sweetmeats in the Conservative Quality Assortment budget,  though, the result might be a wee bit less tasteful.