Monday, 14 December 2015

FINANCE MINISTER TO MEET FISCAL FREIGHT TRAIN

The government has a huge deficit and debt problem; one surely to shake the Liberal Government out of the pretense everything is fine; it was just those damn Tories.

Even the most rudimentary briefing note prepared by the Ministry will demonstrate how unrealistic (silly) were the Liberals’ Red Book promises; at least, the ones with financial implications.

While the results of the November 30th General Election ended Premier Davis’ own brief “fantasy”, fiscal reality will hit the new Administration like a freight train.

The Liberals have nowhere to hide.

The public usually sees the worst impact of fiscal imprudence only when taxes are increased, services are curtailed, or when a large lay-off occurs in the public service.

While the public doesn’t like bad news, governments resist sharing the effects of poor decision making, and the stark realities of a declining economy. Others, like unions, business, community heads, even academics, some unwittingly, others insidiously, downplay the damage imposed by undisciplined fiscal leadership.

Budget speeches are deliberately obscure.  And, because they are not accountants, reporters tend to parrot whatever the Finance Minister says, adding to the misinformation.

That is why, until recently, the only reference to a deficit in the 2015-16 Budget, has been to the figure of $1.1 billion.

That sum was just one-half the actual deficit, at the beginning of the year; far less than half now.

Recently, the CBC reported  the deficit had risen by $700 million to $1.8 billion. The half-truth held.

Well, folks, the Capital Account isn’t for free!

The Budget noted “financing requirements for 2015-16 are expected to be $2 billion due to strategic investments in Nalcor, infrastructure spending, pension reform and to maintain strong public services.”

You might ask: how did a $1.1 billion deficit become a $2 billion borrowing program?

Under the Capital Account, you’ll find $1.143 billion for roads, schools, salt sheds, fire trucks, plenty of labour costs, something as esoteric as “solution delivery”, and not just any investments, but what the Tories called: strategic. They include $760 million for Muskrat Falls and investments in the offshore.

It is not as if government amortizes capital expenditures as the private business does, or that it will write off funding to Nalcor for overruns, even though Nalcor will never return it to the Treasury.

The debt markets don’t distinguish debt for Current and Capital Account either; though as to the latter, there is less unease when any revenue stream is perceptible.

(We'll have a chat about Muskrat's "take or pay" scheme, known as the Power Purchase Agreement, another time.)

So, a recap will magnify the obscurity of the deficit:

All year, it was $1.1 billion when it should have been noted as $2.2 billion.

When Nalcor CEO Ed Martin announced that Muskrat needed another $800 million in June, the real deficit should have been reported as having increased to $3.0 billion.

And when the Current Account deficit increased by another $700 million, as CBC disclosed, at least they should have stated the deficit had risen to $3.7 billion.

Add the revenue shortfall of $100 million, this fiscal year, due to the cancellation of the HST increase, and you have proposed spending in excess of revenue (deficit) of $3.8 billion.

While, naturally, the Finance bureaucrats adhere to General Accounting Principles in recording expenditures, for politicians the deficit is a game of smoke and mirrors. 

We could extend the discussion: capital vs. current account, cash vs. accrual accounting, capital expenditures labelled as strategic investments.

But, let’s stop the pretense. Most of it is sunk cost.

$3.8 billion is a big shortfall. Indeed, it is so much money that the new Minister of Finance will discover the Government can’t borrow the sum, in a single fiscal year.

Not having heard the Deputy Minister of Finance resign in frustration, I have to wonder if the CBC is only partly right, or that some of the Tory spending commitments might have been delayed, or that Muskrat Falls’ inability to come off ‘slow’ speed has reduced Nalcor’s immediate cash requirements.

Likely, too, the government will use whatever cash it has in the system to avoid wearing out its welcome in the debt markets.

Perhaps, all of it is wishful thinking!

Whatever the case, our fiscal crises is very real.

Without major decisions to cut jobs and programs, the future does not look any less grim.

This year, former Finance Minister Ross Wiseman forecast four more years of deficit, to 2018-19, and capped borrowing at $4.85 billion. But he contrived the revenue figures, by over estimating future oil prices. Wiseman assumed they would be more than double current levels.

Total debt was $12.2 billion at the end of the last fiscal year. Add the $2.7 billion Promissory Note, representing the deficit in the Public Sector Pension Plan. And add somewhere between $2-3 billion for Current and Capital Account.

Then, the public purse might be asked, again, to help out Ed Martin's Muskrat fiasco.

That essentially describes the “freight train” that will greet the Premier and the Minister of Finance.

Starting this year, the debt figure will accelerate, especially if the Ball Government dithers. 
$20 billion total public debt may be reached and exceeded by mid-term....if the funding can be raised. And that is a big IF. A rating downgrade will be delivered earlier. Higher interest rates will necessarily follow.

There is no respite from the over spending, from increasing demands and diminishing revenue; not from oil, including Hebron, or through the economic diversification potential that emerged in the Liberals’ desert (that’s one “s”) of campaign policy ideas. 

Yet, there is still the possibility of leadership. The question is whether the Liberals will act like Damocles, desiring only the pomp and circumstance of Dionysius' throne, when something far greater is called for.

But, where are the signs?

It is not as if the Liberals have done anything to dampen public expectations.

The new Finance Minister had better come armed with a Plan.  Not just the likes of Moody’s will want to hear it; the people who swept the Liberals in, and booted the Tories out, will need to know, too.

You will rightly ask: is there any alternative to a nightmarish scenario?
The short answer is "no"!  

The Liberals have little choice but to deliver the dose of realty you have long been denied.

Indeed, unless the government chooses very deep and painful cuts to programs and services, including hospitals and schools, to public sector employment, and chooses to impose higher taxes, too, Dwight Ball will be forced to put the Muskrat Falls project up for sale, with all the costs and implications that decision implies.

The Government will need to sell Nalcor’s equity stakes in the offshore and cancel all programs in pursuit of Williams’ crazy energy warehouse idea.

A complete Muskrat Falls review will precede this inevitable outcome.

Hopefully, Dwight Ball didn’t waste a meeting with the Prime Minister for a ‘photo-op’. The HST issue could easily have been resolved between Deputy Ministers.

It is a difficult and rare opportunity to see the PM “one-on-one” at the best of times; but, if he went to Ottawa unprepared to discuss the province’s fast emerging fiscal woes, he will surely have struck the first gong on a new amateur hour!

The "The Jig Is Up"  for Muskrat, "JM" wrote in an October post. I suggest the jig is up for all of us.

The only laughable part will be watching the Liberals explain why they were impervious to all the warnings.

Everything else will be painful.

7 comments:

  1. One of the big illusions in this province is that the deficit will disappear in 4 years due to increased revenue? This is without basis, as the Hebron royalties will be much lower than was ever envisioned. Tier 1 payout will be extended well into the next decade. We have 10 years of major deficits unless we do something. Dwight needs to balance the budget in a 5 year plan that wont kill the economy.

    But things now are still really good in the province. Wait until 2017 when Hebron and Muskrat winds down.

    Danny Williams created this mess. People still cheer him at Mile One, or the media go on tours of Galway without asking any questions of his great political legacy. Herin lies the issue in Newfoundland's history.

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  2. Sadly you are right about having to sell Danny's dream for a song to keep the province solvent. Emera will end up owning MF after the fire sale.

    All the contracts for MF must be made public now by the new government. They need close scrutiny and continuing to hide them will implicate the incoming government in the disaster unfolding on the Churchill.

    The north spur stabilization plan was promised by Nalcor in 2011. It has not yet been made public. Given the real risks, financial and physical, the incoming Liberals are in the crucible. Will they protect the public and the investment and release all engineering reports on the spur or will they continue the shocking disregard shown to date for the looming catastrophy.

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  3. Good post. To the actual deficit and debt I'd add one more number that people should be talking about: the cost of servicing the debt each year. You are right to point out that the provincial government's room to manoeuvre will diminish as the fiscal situation worsens. Presuming that low interest rates will last is little different from presuming that high oil prices would last.

    One root of the problem is that the Tories engaged in Keynesian-style policies precisely when the province needed it the least. Massive public spending and construction projects drove up the cost of labour and housing, fuelling high consumer spending. Now, as the construction projects wind down and health care costs continue to rise, the dependence on oil revenue will only worsen.

    The problem facing Dwight Ball is the risk that cutting public spending poses to the provincial economy. If oil prices do not recover unexpectedly in the short-term, then the only engine left to keep the economy afloat will be public spending (and, as you point out, "public spending" should encompass Nalcor). If Ball cuts spending or raises taxes at same time that oil & mineral prices remain depressed (and the job market in Alberta remains soft), then the so-called "mild" recession will be anything but mild. The media already seem to be poised to make Ball the scapegoat for Danny Williams's mistakes.

    Dwight Ball is, in other words, stuck.

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  4. "The HST issue could easily have been resolved between Deputy Ministers."

    Obviously, you did not do research about this file.

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  5. I think Mr. Ball will be doing .......ooops, should be doing some soul searching right about now as to WHY he ever got involved in politics in the first place! Therein lie the answers as to how he will proceed in the days to come!

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  6. I find absolutely frightening that the new Liberal government is so paralysed in front of this phenomenal fiscal situation. No change to HST. Cozzying up with the unions to keep all the public service in their jobs. No plan to reduce spending whatsoever! No plan no ability to increase revenue!!

    To continue making matters worst and worst, the vast majority of Newfoundlanders simply take most of their money to Costco and Walmart, and ship all their monies directly to New Jersey and Kansas... without a second thought!! Newfoundland will never develop economically so long as they remain unwilling to spend their money at home. No one really questions why so many Newfoundlanders have to go to Alberta or elsewhere to work and make a living. Yet this is a clear, visible, cause-and-effect situation.

    Despite the highest literacy rate in history of mankind, most people seem to have no idea whatsoever about basic economics. Most people chose to ignore and avoid collective economic realities... it's easier and less stressful. Most of these college and university graduates of all ages simply believe money grows on trees.

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    Replies
    1. I agree.....a very sad situation indeed. When you remember just a few short years ago, NL was "riding high"!

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