The Fragile Economy: addictions management #nlpoli

The provincial government in Newfoundland and Labrador spends more per person on delivering services for most things than does any other provincial government in the country.

Health care is the one the Premier highlighted a couple of weeks ago.  There are others.

This is not something new.  Here’s a snippet from a post in 2009 back when Paul Oram lit the issue up from inside the current administration.  Note, though, that the quote highlights the situation three years earlier:

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.”

The reason for all this spending and the generally high cost of government in this province is simple:  government spending is all about paternalism, patronage and pork. 

Note that the largest employer in Grand Falls-Windsor these days is the local hospital.  The town is also a centre for government services and, as in Stephenville, the major provincial government response to the mill closure was to push in more public service jobs.

Public spending is all about jobs.

The problem with public spending is that it is easy to get hooked on it.  Not surprisingly, a recent post at the Monkey Cage went with the title “The Narcotic of Government Dependency”.  It’s a pretty concise discussion of the issue from the American perspective with plenty of interesting links.  Follow the links and you’ll find plenty of stimulating stuff. 

Canadians might find it especially interesting to see reference to David Frum’s assessment of the inherent contradiction in conservative arguments.  While they rave and rant against public spending on a ideological basis, on a practical basis, American conservative constituencies are also among the biggest beneficiaries of federal government programs.

Now in this province, the local conservatives don’t really have an ideological basis to argue against public spending. They aren’t really caught in that trap.  But it is interesting to notice the gap between their self-image of being fiscally conservative, debt- fighting wunderkind and the reality of running up the biggest debt load in the province’s history and wanting to jack it higher.  Plus they’ve increased dependence on government spending and increased the public service to an unprecedented size.

looked at from that perspective, Kathy Dunderdale’s recent speech about the need to tighten public spending wasn’t so much about putting the province on some kind of methadone program for patronage junkies so you could get ‘em off the junk.  It seems more likely to have been about another type of addictions management, more like “b’ys we gotta lay off the pipe for a while and just do the oxys and some percs”.

- srbp -

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.

-srbp-

Provincial government wakes up on EU trade

Almost two years after your humble e-scribbler pointed out the blatant stupidity of the provincial government’s decision to boycott free trade talks, the provincial government is now sorting itself out.

The provincial government trade gang will switch from observers to participants at the upcoming trade talks between Canada and the European Union in April.

The old policy  - supported unquestioningly by the same people who have now turned 180 degrees – was stupid because it jeopardized the existing and future economic interests of the province and left local industry to being left out of a new lucrative market.

What’s worse, the old, stupid policy threatened to increase the dependence of the local economy on  on the American market. As a result, the provincial economy would become even more fragile than it had already grown as a result of seven years of backward economic policy by the provincial government.

It may have taken two years but the current crowd have finally figured it out.

- srbp -

Brain Farts #nlpoli

Some people have a hard time with the idea that a great many political decisions are not the product of deep thinking, extensive research, and agonizing debate.

They come from brain farts.

You can hear that pretty clearly in the most recent episode of On Point. The political panel talked about a couple of cock-ups by the Conservatives last week.

 In among the few nose-pullers the panel tossed out, the basic elements of the story were there.

Government cash give-aways #nlpoli

CBC’s Rob Antle has updated work done over the past couple of years on government give-aways to private sector businesses in the name of economic development:

The Newfoundland and Labrador government has funnelled more than $20 million into grants, loans and the direct costs of business-attraction initiatives that have provided a net benefit of fewer than 100 new jobs — a quarter of them seasonal.

Faithful readers will notice some familiar names in the story and the associated documents posted with the online version of it.

Kodiak got $8 million to expand its operations at Harbour Grace.  They laid off workers instead.That isn’t the only example of that sort of thing happening.

Then, there’s Dynamic Air Shelters,which has more government cash in it than many Crown corporations

None of this is surprising since Newfoundland and Labrador is the only province in Canada where the private sector prefers to be publicly funded.

It’s another way in which the provincial economy has grown increasingly fragile over the past eight years.

- srbp -

The Doldrums #nlpoli

MQO conducted a little poll in late January and found the party standings among voters remains where it was in November.

No surprise.

Nothing has happened in the past few months to move support for either of the three parties in the province up or down.  We are in the lull before the provincial budget coming in March or April. That lull isn't happening by accident.  The Liberals retreated last summer in the face of massive public rejection of their spring budget.  Since then the ruling Liberals have been virtually silent, cancelling planned budget cuts and other measures to cope with the government's financial crisis.

That silence resulted in a very slow climb in Liberal support from a low of 17% in May 2016 to about 27% of all respondents by the fall.  But look at the Conservative number.  It's basically the same as the Liberal one, given that the margin of error for the poll is plus or minus four percentage points.

Gone, baby, gone #nlpoli

In September 2008,  four cabinet ministers went to Harbour Grace to announce that the provincial government was giving the company $8.0 million in public money,  interest free.

The provincial government communications people circulated a picture of the four at the time - from left, Jerome Kennedy,  Danny Williams, Paul Oram, and Trevor Taylor – as they tried on some of the boots made at the plant.  Every one is smiling.  The $8.0  million in taxpayers’ cash was supposed to help the company add another 50 full-time jobs on top of the 170 at the plant.

It’s an interesting picture because within 12 months of the announcement,  the two on the right – Taylor and Oram – would be gone from politics.  Williams left in 2010,  the year the provincial government started a “review” of the loan after the company cut the work force to 100.  They never did add any jobs. Kennedy hung on the longest of the lot,  but five years after his trip to the boot factory, Jerome was gone from politics as well.

Ridiculous is all the rage #nlpoli #cdnpoli

Fresh from her triumphant speech about co-operation and consultation as the way to develop the north, the potential for developing uranium in Labrador and  - of course – the glories to come from Muskrat Falls, Premier Kathy Dunderdale is off to Atlanta as part of an Atlantic provinces’ trade mission.

Regular readers will recall then-business minister Paul Oram’s insightful interview on Newfoundland and Labrador history during one of his trips to Georgia.

Yes, friends, this is not the first time people from this province have gone off to the southern United States to see if we could increase trade with the Americans.  It has been a popular destination.  Danny Williams took one of his last over-seas trips to Mississippi as part of one of the trade junkets.

As you can see from that post on Williams’ trip, the Americans are looking for people to come to their states, invest money and start creating jobs for their people. There could be no better time to talk to them about investing in our province and creating jobs here.

Obviously.

And if you wanted to find some place to sell stuff we make then surely there can be no better time to do that than when our largest trading partner  - the United States – is struggling to come out of a recession. 

Again, a bit obvious, but apparently not quite so obvious to some people.

In a province where even the finance minister said the economy was fragile,  the provincial government can’t quite seem to get the concept that looking for new markets might be a good idea.

Other people certainly get the point.  Prime Minister Stephen Harper has been talking about expanding trade with Asia and Europe.  In British Columbia, they’ve got a new natural gas strategy  - h/t to David Campbell in New Brunswick – that talks about developing natural gas as an export to places like Asia.

Meanwhile, in Newfoundland and Labrador, there’s no serious interest in finding new markets for stuff. A couple of years ago, the current provincial government refused to take part in trade talks with the Europeans.  The locals were more interested in the seal hunt than in creating jobs. Just last year, one local politician said it would be like doing a “back-room deal with a group of serial rapists”.

You can see the level they are working at.

As for natural gas, developing it for any practical use at all is about as popular an idea in government circles as a one cheek sneak sliding across the pews on Sunday morning.

Any talk of it as a means of generating electricity gets them raising the completely absurd idea of buying liquefied gas from somewhere else and importing. 

Too expensive, the government’s favourite economist clucked, to be a viable alternative to the favourite economist’s preferred project. He didn’t really even need to hold a match to his straw-man to watch it burst into flames.

And the local natural gas? 

Well, it’s just not possible.

Because, well, it just isn’t.

Never mind that you wouldn’t have to liquefy the stuff to bring it ashore.

Never mind that there is enough of it out there to power a 500 megawatt plant all day long, every day, all year long for a century.

Never mind that they could get it from one field today where it is getting costly to re-inject the gas they get during oil production. 

Never mind that the provincial government need take only as much gas as they needed to run a gas-to-electricity plant. 

Never mind they could put a price on it and take the gas as a partial credit for offshore royalties.

Never mind there’s likely tons of it onshore Newfoundland.  The same people pushing the very expensive electricity scheme actually found gas in 2011 in not one but two wells drilled at Parsons Pond. Nalcor shut down drilling on a proposed third well because they found gas, not the oil the company hoped for.  And, as CBC reported:

Vice-president Jim Keating said there is no need for a third well as it would likely produce the same result.

Same result being gas.

Gas?

What could they possibly do with gas?

Sheesh!  <insert eye rolling>

The government crowd want to go with their Labrador project and that is really the end of it as far as they are concern.

It is a green project, you see.

Just don’t bother to notice that their “green” scheme includes building – wait for it – more oil-fired generation than the current plant they want to replace with the hydro one.

Not gas.

Oil.

Yes, their argument is ridiculous, but then again, it’s no more ridiculous than giving up a market worth billions for new products in order to posture about a product almost no one wants any more.

Or heading off to the sort-of recessionary United States for the umpteenth year in a row to talk trade with people we already trade enough with.

Ridiculous, you see, is all the rage.

- srbp -

The past in our present, once again

Finance minister Tom Marshall today raised the spectre of 1933 and the collapse of Responsible Government in Newfoundland. He did so in the context of launching an attack on Liberal leader Gerry Reid based on Reid's comments in Labrador which Marshall took out of context. Marshall said the context was irrelevant, just saying the word bankruptcy was bad.

Marshall raises an interesting point for anyone looking at this campaign and wondering whether or not to vote, let alone decide which candidate to vote for. If the Telelink/NTV poll is any indication, that could be upwards of half the electorate.

The incumbent Tories make much of the supposedly poor financial state of the province in 2003. it was largely a fiction, as much as Marshall's claim that there was $305 million in the current budget from the 2005 offshore deal. That little myth has already been disposed of. There is no money in the budget from the 2005 deal; there is merely a set of numbers put on the paper to show the draw down on the cash advance. But this money has already been spent. it does not exist as new cash this year.

So what would it take to bankrupt the province? Let's take a look at two examples from the province's history when financial circumstances were indeed tight.

The 1933 Debacle

- $100 million in debt.

- $30 million in government revenue.

- $35 million gross domestic product.

- $3.5 million government budget shortfall.

A decade of political instability characterized as much as anything else by a remarkably familiar style of politics:

"Rival politicians … in the desire to secure election, were accustomed to make the wildest promises involving increased public expenditure in the constituency and the satisfaction of all the cherished desires of the inhabitants. The latter, as was natural, chose the candidate who promised them the most.

“…the electors in many cases preferred to vote for a candidate who was known to possess an aptitude for promoting his own interest at the public expense rather than for a man who disdained to adopt such a course.

“They argued that, if a man had proved himself capable of using his political opportunities to his personal advantage, he would be the better equipped to promote the advantage of his constituents; an honest man would only preach to them.”

Not a single provincial party in the current election is speaking of debt reduction. Rather there is talk of spending increases and, where anyone whispers the word, debt management. That is code for rolling over debt at cheaper interest rates or, as Danny Williams has said, actually borrowing more money on top of the $485 million in additional debt the government has incurred since 2003.

In 1933, the government debt was three times the size of the provincial economic output. The total government budget was slightly less than the economic output and the annual budget was short by $3.5 million or $10 percent of its total.

That was the state of the place when the legislature voted to accept an appoint commission government.

Using figures in Budget 2007, it would be virtually impossible to repeat that scenario in the current context even if every government for the next decade was completely insane. Canadian fiscal transfers would forestall bankruptcy or anything as dramatic as the 1933 situation and most likely action would be taken long before the provincial government put itself into the 1933 state again.

Just to put it in perspective consider that in order to come close to the 1933 mess, the provincial debt, on an accrual basis would have to reach upwards of $70 billion compared to the $11-12 billion currently. The annual provincial budget would have to reach spending of almost $20 billion annually, compared to the $22 billion current gross domestic product (approximate, using current dollars). The annual shortfall would have to be on the order of about $1.5 billion to $2.0 billion.

The early 1990s

- Provincial debt approaching $8.0 billion on an accrual basis, significant amounts held in high-priced foreign currencies.

- Provincial GDP of slightly more than $8.0 billion.

- Low oil prices. (US$8 in 1992 compared with forecasts of a decade earlier that oil would be well over $40 and may reach as high as $100)

- Low mineral prices (mineral prices are cyclical and are currently high)

- Declining fishery (followed by cod moratorium)

- Low Canadian dollar.

- Government spending on current account of $3.5 billion (approx.) with annual declines in revenue due to economic circumstances.

To match that situation, the provincial debt would have to reach the better part of $22 billion compared to the current $11-$12 billion. Government spending would run at about $9.0 to $10 billion, assuming that current account spending was about 43.75% of GDP and the annual deficit would be about $1.0 billion.

That situation is not as extreme as the 1933 scenario by any stretch. Mineral prices are cyclical and will likely drop in the next decade and remain low for a period. Likewise, and based on recent experience, oil prices may not continue at their current high levels. As for the fishery, its future economic performance is not guaranteed either, especially in light of global competition and declining resource in some sectors.

If we allow for energy corporation debt on existing projects of about $500 million (acquisition plus development costs, before revenue flows )and a Lower Churchill project of approximately $5.0 billion, the current provincial debt would reach about $17 billion.

As an aside, the Lower Churchill project website has now been taken over by NL Hydro. As a result background documents on the consultation process have vanished to dead links. Those dead links contained project cost estimates.

Taken altogether, the prospect of imminent bankruptcy for the province is remote. Even allowing for added debt over the next decade coupled with an economic downturn, it would almost impossible to conceive of a realistic scenario in which the 1933 situation recurred.

The situation in the early 1990s is not quite so remote but it would still take a concerted effort to undo the economic progress of the last 15 years.

The cost of developing the Lower Churchill and offshore projects would not decline significantly in the event of an economic downturn, for example, but resulting revenues would. As such it is possible to develop scenarios in which the provincial debt climbed to levels significantly above their current one, while at the same time, the size of the economy and resulting government revenues did not increase as dramatically or even declined.

Consider that Budget 2007 forecasts a decline in the provincial gross domestic product over the next three years while at the same time forecasting increases in government spending on the order of over nine percent in the same time frame.

This is a very rough comparison of two historic incidents with the current situation. No matter how one looks at it, the prospect of the province becoming bankrupt within the next decade is remote.

That's part of what makes Tom Marshall's comments odd. After all, if the provincial economy and government finances are so fragile that a mere $100 million of spending annually over a decade would break the treasury, his comments only raise questions about his own plans to borrow and spend considerably more than that in the same time frame.

-srbp-