Moody's warns NL government on finances #nlpoli

Moody's Investor Services is the second rating agency to give the Government of Newfoundland and Labrador a negative trending  in light of the government's financial problems.

In a release, Moody's said that the "negative outlook for the Province of Newfoundland and Labrador reflects the rising risk that the province's fiscal position will deteriorate further than previously expected in an environment of protracted low oil prices and reduced economic activity. Without corrective fiscal action, this will lead to significant deficits, resulting in rapid debt accumulation across the medium-term."

Moody's expects oil to sell at US$33 a barrel in 2016 rising to US$38 a barrel in 2017 and US$43 a barrel in 2018.  The company expects that this will lead to significant deficits, with the deficit for the current fiscal year expected to reach 32% of revenue.  

"The outlook could be revised back to stable if the province introduces and implements a comprehensive fiscal plan that limits debt accumulation and debt service at levels in line with similarly rated peers, or exceeds these levels for a short period only."

Although the company describes the provincial debt level as low compared to its rating peers,  the company cautioned that "a lengthy period of consolidated deficits, along with a long-term expectation of recording debt in excess of 200% of revenues ... could result in negative pressures on the rating."

Gross debt is already more than 200% larger than anticipated revenues and net debt is almost guaranteed to hit or exceed that trigger, if the company includes consideration of the financial implications of Muskrat Falls.  

-srbp-

Jerry Earle won't retweet this post #nlpoli

Apparently the surest way to piss off a couple of university academics a.k.a the NDP policy brain-trust is to point out how their take on the government’s financial crisis is out to lunch.

Short recap:  Math prof and Indy columnist Tom Baird got hold of an access to information response that explained the calculations behind a comment by cabinet minister Susan Sullivan on Twitter in March 2015:

In 2014 NL taxpayers will pay $744 million less as a result of tax deductions – affordable?

The ATIP request asked for a breakdown of that $744 million figure. Tom left off the cover page from the response when he posted a link to it in his Independent column in 2015.

“Tax cuts made during the Williams-Dunderdale era now cost the government $744 million in revenue each year,” Baird wrote, “ according to a recently released document from the Department of Finance obtained through an access to information request. This accounts for more than two-thirds of last year’s $1.1 billion budget deficit.”

That just doesn’t look right

Revenue problem #nlpoli

Jon Parsons  has an interesting take on the provincial government's financial mess.  It’s worth taking a few minutes to go through it.  Follow some of the links he offers as well.  Altogether they form what you might call a different perspective on things:

 The current deficit and debt…are the result of decisions that were made by a small number of people, and also because of the whims of the global trade in oil.

The key element of Parsons’ argument is that we are not dealing with a spending problem but a revenue problem.  We don’t bring in enough money largely because local elites have given away gigantic benefits to the local rich and to multi-national corporations.

The idea we have a revenue problem isn’t new and it certainly isn’t unconventional.  The province’s three political parties and the public sector unions all basically say the same thing or have made the same claim over the past year.

‘Engagement’ can be an excuse for avoiding action #nlpoli

by Craig Westcott

The Ball administration is off to a shaky start. Actually, it seems afraid to start at all. Tuesday’s press conference announcing 15 months of public consultation on how to handle the deficit is another indication that this administration is afraid to act. To use a tired cliché, the Liberals are like the dog that caught the car and doesn’t know what to do with it.

 Granted, the party has only been in power about a month, with much of that month being down time due to Christmas and the New Year’s holidays. But the Liberals had plenty of time to prepare an action plan. It has been obvious for the past two years that they would inherit the new government. That’s why the lack of a transition plan is so perplexing.

 Ball and his ministers need to send signals, already overdue, that they are changing the way we “do government.”

Enough #nlpoli

You can easily lose track of the number of former cabinet ministers who will tell you the same thing.

Ask them about the one lesson of government and budgets that stands in their minds.  They’ll likely all tell you some version of the same thing.

There is never “enough.”

No matter how much money you put into a department,  that department will always want more or have a way to spend more.  Doesn’t matter the department.  You can never spend “enough” such that you can safely say you can then turn to another department and start trying to give it “enough.”

Metrics #nlpoli

Telegram editor Russell Wangersky tried on Monday to put the government’s financial mess into some shape that people could understand.

The simple fact, to put a shortfall of $2 billion into perspective, is that if the provincial government wanted to cover those costs outside of oil revenues, it would have to not only double the province’s income tax rates, but double the provincial share of the HST as well. (Given the current five per cent federal and eight per cent provincial breakdown of the 13 per cent HST, that would bring this province’s total sales tax to 21 per cent.)

If we could do that, we’d break even, says Russell.

Well, ummm,  no.

Russell’s got the right idea.  He just missed another billion dollars of borrowing in the budget for capital spending.  The way the government reports its spending that capital works borrowing keeps getting left out but it is stuff we have to pay for. 

And that  $3.0 billion is just to cover this year.  Next year,  the problem is due to get worse again.

Consistency #nlpoli

"We need to find a way to bridge us [from] where we are currently until the commodities rebound and be [sic] the significant contributor we need them to be." That’s what Premier Dwight Ball told NTV’s Mike Connors in an interview that will air in full this coming Sunday.

The words are very familiar. 

We heard them just a few short months ago.

"I have laid out a five year plan,” Conservative finance minister Ross Wiseman told the House of Assembly last spring, “to bridge the commodity revenue dip and get us back to surplus, step by responsible step." 

Advice #nlpoli

New governments often wind up in a bit of a pickle.

They walk into a new job where they are supposed to be the folks in charge, but they very often aren’t the people who initially know how everything works. They don’t know how to get things done but they have things they need to accomplish.

The folks who do know how everything runs are the public servants.  According to the theory,  the public servants are supposed to be the impartial professionals who give every government expert advice n how to handle every problem.  They are supposed to be separate from the politicians.

The theory is one thing. 

Practice is another.

The Merry Christmas Financial Update and other sick jokes #nlpoli

First, anyone who keeps talking about the two percent HST cut simply has no idea what the hell is going on in provincial finances.

Seriously.

Give it up.

You are only embarrassing yourself.

Second, absolutely no surprises in the latest update on provincial government spending. Well, no surprise for anyone who has been following SRBP faithfully.

For the rest of the folks out there,  the whole thing probably came as quite a shock.

Revisiting the spring budget: a little thought experiment #nlpoli

Last spring,  SRBP looked at some speculative budget projections using some different prices for oil and  assumed growth in revenue from non-oil sources.

The results weren’t pretty.  The only way to get to a surplus was if you managed to hold spending constant.  Even a modest increase in spending would throw everything out of whack.   And in the one scenario where you got a surplus, it vanished as oil production dropped.

Well, folks, reality turned out to be uglier than the optimistic forecast of the provincial government at the time and its pet economist, Wade Locke.  The assumed average price of oil last spring is now a distant memory.  The most recent forecasts from the United States suggest oil may hover around US$50 a barrel until we are into the next decade.

So let’s take another look at those figures.

Small things and big differences #nlpoli

The Auditor General delivered his annual report on some of the provincial government’s programs and services on Wednesday.

We learned, among other things that provincial government consulting contracts have gone horrendously beyond the amount originally budgeted.  The worst case was a contract – presumably related to the Corner Brook hospital  - that wound up  being 780% beyond the original budget. 

One of the big culprits in the escalating costs were change orders.  Those are, as the name suggests, changes to the original contract required because of changes made by the government. That was the case both in capital works contracts that involved changes to construction but in service contracts as well.

Everything will be fine. Or not. #nlpoli

This pretty picture shows a very ugly problem.

Look at the point (2008) where the red and blue lines separate.  The area in between represents the annual deficit the provincial government has been running. It is the difference between the amount government spent (the blue line) and the amount of income the government had from everything that wasn’t oil and minerals.

All that space in between those two lines is debt.  It is either borrowing from the banks and other lenders or it is borrowing from ourselves through spending all our one-time oil money. If the government spends as they indicated in the budget, about two thirds of that gap on the far right is borrowing from the banks.  One third is from oil money.

Just for a bit of fun,  let’s project ahead into the future a bit to see what might happen.  We’ll use the oil price projections the government used.  And we’ll use the most recent oil production figures from the offshore board. You might be surprised at the results.

Oil Royalty and Oil Price Forecasts (2015) #nlpoli

Don Mills says people in Newfoundland and Labrador have a false impression of the state of the provincial economy.

Wade Locke says Mills is full of it.

To bolster his argument, such as it is, Locke released a raft of pretty charts a couple of weeks ago.

One of them included a slide showing projected offshore oil production. (right)

Conservatives stay the debt-building course #nlpoli

Budget 2015 offered absolutely no surprises.

On major areas the Conservatives continued their policy of spending more than the provincial treasury can afford.  That’s been their trade-mark since 2003 and it became etched in stone in 2009.

As SRBP forecast a couple of weeks ago, the Conservatives raised a modest amount of money through a two percent hike in the provincial sales tax and a variety of small fees.  They added some new tax brackets at the upper end of the income scale.  The small twist in that one came from the actual release of the proposal by Memorial University’s economics department.  They recommend an improved rebate scheme to transfer the additional tax revenue to lower income residents.

Other than that, the Conservatives borrowed heavily. The deficit is a record for any government since Confederation. Your humble e-scribbler knew it would be bad.  It was worse than imagined.  That’s because – contrary to the forecast – they didn’t reduce capital works spending.

Lots of people are focused on the tax increases.  They amount to slightly more than than 10% of the total deficit. In the bigger scheme of things it is nothing.  It is just laughable for anyone to call this budget “tough”. 


Let’s look at some specific points.

More of the same. It’s the economy. And, … #nlpoli

Past behaviour is a good indicator of future behaviour.

If that’s the case, then lots of people are getting their knickers in a very great bunch over nothing when it comes to the budget.

The Conservatives set their course with Wade Locke’s prosperity plan. Here are the key elements, as SRBP laid out in 2013

• Government will budget for annual deficits of about $500 million (accrual)/$1.0 billion (cash), if necessary.
• The money to cover that deficit will come from borrowing.  That is, government will borrow from lenders, as Tom Marshall said in 2012, or government will take money out of temporary cash reserves, with no apparent intent to re-pay that own-source borrowing.
• Government will make up any shortfalls beyond that deficit level by cutting spending in one area and shifting the spending to other areas.  

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?

The Unsustainability Problem #nlpoli

The annual budget consultation farce started on Monday with a couple of sessions.

This year the provincial government has turned out a budget simulator that is supposed “to illustrate the tough budget choices” the provincial government is facing and “to promote a public dialogue on how we can set a sustainable fiscal course.”

The simulation can’t really do either of those things.  The information is relatively recent but the options to adjust income and spending don;t cover the full range of policy choices the government can make.  The ones it does offer are artificially limited to presented increases or decreases.  That’s a programming choice as much as anything else, but the reason for the artificial limitations is not important.  The fact is that the choices are deliberately limited.

The result is that people can’t really see what sorts of choices the provincial government might make to set a “sustainable fiscal course.” In that sense, the current “consultation” is as artificial as all the other ones the provincial government has run over the past decade or so.   People aren’t stupid.  They can handle the truth.

The politicians and bureaucrats can’t.

The Legacy of Faulty Assumptions: Hebron Revisited #nlpoli

Hebron is the last of the four, big, offshore discoveries from the 1980s.

It’s due to come into production in 2017 based on a development agreement reached initially in 2007 with the provincial government and finalised in 2008.  There’s a potential problem with current production schedule.  The topsides fabrication is delayed in Korea but we won’t know until the middle of 2015 whether or not there will be further delays that would impact the planned date for first oil in 2017.

Hebron plays a big role in the imagination of the people currently running the province.  Their reaction to the provincial government’s financial problems is based, in part, on the expectation that Hebron will bring huge amounts of new cash into provincial coffers.

But with oil prices down,  people are starting to consider that those assumptions about an imminent return to insanely fat oil royalties might be a bit off base.  With that in mind, let’s revisit the Hebron development agreement and see what turns up.

Worry more about next year #nlpoli

Provincial revenue from oil will be $791 million less than forecast in the spring budget, according to the provincial budget update.

A few other expenses are less than forecast and some revenues are up.  All told,  the provincial deficit is now forecast to be almost $1.0 billion.  That compares to the $572 million shortfall predicted last April.

The provincial government’s financial problems aren’t caused by falling oil prices.