Wednesday, 20 January 2016


Guest Post Written by "JM"

As a regular follower of provincial politics[1] and current affairs, I was generally aware that spending by the provincial government had increased, since 2006, to levels well outpacing inflation.  Yet it was not until the release of the 2015 Budget, and the province’s “5 Year Plan”[2] for fiscal recovery, that I awakened to true state of the provinces finances.  The $1.3 billion projected deficit in that year was enough to garner attention. 

However, it was the government’s prediction of a nearly $2 billion increase in revenue, during the period 2015-2020, as the main driver for a return to balanced budgets, that seemed unlikely enough to be incredulous.  
I remember reading the assumption for revenue growth and realized, immediately, that it was just too optimistic.  Considering the prevailing pessimistic outlook for oil prices (even in early 2015), combined with lower economic activity, higher unemployment due to the completion of our resource based megaprojects, and the lower royalties from Hebron, too, my reaction was thinking that the prediction amounted to nothing less than reckless fiction.  In the absence of a miracle, I concluded, it would be virtually impossible for the province to return to a balanced budget by 2020. 

Within the 2015 Budget Highlights document, the government stated there would be nearly $5 billion of new borrowing; the amount necessary to bridge the revenue shortfall to 2020.  Based upon my own more reasonable assumption of new revenue growth, and the near certainty that the budgeted sum for Muskrat Falls ‘equity’ would increase, I also concluded in April 2015, that by the end of the decade new borrowing in the $8-10 billion range would be necessary. 

The full extent of the Province’s structural deficit had become obvious.  Without decisive change, the Province would commence a period of borrowing to a level unmatched in our history.

The Budget Highlights glossy brochure was clearly written by a government preparing for an election. Exaggeration, even hyperbole, while unwarranted at any time, is often found to underlie those democratic expositions. But, it should be said the P.C. Government’s slogan “Balancing Choices for a Promising Future” was derived from neither balance nor promise. In fact, it can best be characterized as delusional. 

Having come to that conclusion, I began studying the budget documents delivered over the past 20 years.  My initial goal was simply to understand how we had regressed from the position of having a balanced budget in 1996, to the current “Updated” one recording a deficit of nearly $2 billion; in essence, a financial debacle.

Amulree had asked a similar questions in 1929, and I wondered, too, in the current context: how Newfoundland and Labrador, even in a period of relative economic prosperity, could have acquired such a staggering borrowing requirement? 

The research undertaken in April and May, 2015 evolved into a series of posts, published on the Uncle Gnarley blog, entitled “A Budget Colloquy”.  I do not suggest it is complete; however, I think it is a worthwhile endeavor; possibly, one that serves as a tutorial in the experience of downside risk found in the “unwarranted assumption”. 

There were some startling statistics that resulted from this work.  I want to cite just a few:

·     In the period of 2006 to 2010 annual inflation adjusted spending increased from $5 billion to $6.8 billion.  The 35% increase in real spending, in 4 budget cycles, is the underlying cause of our current budget deficits.

·       In inflation adjusted dollars, the amount spent by the government on salaries has increased from $1.7 billion in 1997 to $3.8 billion in 2013.  In real dollars (after inflation) the government spends twice as much on salaries now than they did in 1996. 

·       In 2013 nearly 50% of government expenditures was associated with salaries.

·       In the period of 2007 to 2014 (oil boom) capital works spending was $2.3 billion above the historical norm of $300 million per year.

·       In the period of 2007 to 2014 (oil boom) an amount of $8.5 billion above the historical norm was spent on salaries.

·        During the oil boom for every new $1 in infrastructure spending there was $3 new dollars spent on the public service.

·       Reductions in income tax and HST were clearly premature. 

·       In the period 2015-2016 the province’s combined annual income from federal sources and offshore royalties will be less than the federal sources, alone, in 1997, in real dollars.   We are in purgatory when it comes to federal transfer payments.   

Against the backdrop of the recent fiscal Update released by the newly elected Ball government, I thought it would be beneficial to consolidate these posts, as they appeared, in a single reference. The Colloquy contains plenty of historical data, analysis, and ideas for financial reform.  

I believe it is important that the public fully understands how we got here and some of the decisions required to reverse this sad and unfortunate circumstance. Indeed, as I see it, the fiscal situation is dire enough that Newfoundland and Labrador may be entering Stage 2-3 of a debt spiral3.

The general population seems to be awakening to this fiscal crisis, although it is less than clear that the new government understands the depth of the trouble the province is in, or if it is willing to act in a timely manner.  

My greatest hope, quite simply, is that readers will conclude, as I have, that this debt and spending crisis is real.  

That realization, alone, might inspire this truly vulnerable society to step back from what the financial precipice on which we are resting. 

Hopefully, readers will profit from the opportunity to better understand the origins of the crisis, as I have, and assess the measures proposed in the eight Posts of the Budget Colloquy. Such a difficult issue will naturally attract different views and as many solutions. That is perfectly natural. (The full Budget Colloquy will be published on the Uncle Gnarley Blog, next week, under the title “A Decade of Squandered Opportunity”.)

But there is one thing on which we must find unanimity, and quickly: that is the need to act. We must individually and collectively accept that cutbacks and belt tightening will be both unavoidable and painful. In addition, we must be prepared to tell the new Government of Dwight Ball we expect his Ministry to act courageously, expeditiously, and wisely.

Ever the optimist, I hope that in acknowledging the crisis and dealing with it, we will recognize its origins in failed leadership. By acting firmly and decisively, I also hope there will emerge from this sad and unnecessary experience, a stronger, wiser, more enduring Newfoundland and Labrador society.

1. I have been a regular reader of the Sir Robert Bond Papers Blog since 2007.  Although our opinions sometimes differ (rarely) we have to duly recognize the contribution he has made in identifying the issues in real time. Particularly on the budget, Ed has been right since 2006.    
Stages in Debt Spiral
1.       Debt Levels increase. (This could be due to overspending, inefficient tax collection, bank        bailouts or economic slowdown)
2.       Markets become concerned about debt levels leading to higher bond yields (higher rate of         interest)
3.       Higher cost of servicing debt. Rising debt increases debt interest payments. But, also Governments have to pay higher interest payments on debt because of rising bond yields. This increases government spending even more.
4.       To reduce bond yields, governments need to cut spending and increase tax.
5.     Trying to reduce debt can cause a recession. The Impact of spending cuts leads to lower aggregate demand more unemployment and lower economic growth. Lower economic growth leads to lower tax revenues.
6.     The shrinking economy means it is harder to meet debt repayments. Confidence falls. Bond yields remain high despite the spending cuts.
7.    With a shrinking tax payments, the government struggles to meet interest payments. Also markets no longer want to buy more government debt, leading to partial or total default.


  1. Although the formatting is not great, the "debt spiral" definition is very interesting. We are certainly on a debt spiral. With the completion of the Muskrat Falls make work project, and the Hebron project there will be a collapse in the local economy. Imagine if Muskrat Falls was only starting now! It could have been real stimulus when we needed it. The biggest mistkae with Muskrat Falls was the timing.

    1. This article certainly outlines the seriousness of our financial wows,plus it subtly describes how we landed in this unfortunate situation, that being poor fiscal management going back to Danny days. That being said, one thing I also believe, is that Muskrat Falls, should never have begun and other more viable alternatives should have been explored but were not mainly because of the dictatorship we were subjected to these past 12 years. The total extent of the damage caused to our provincial economy will not be fully understood until the axe falls. Unfortunately, some will lay blame on the liberal government rather than hold the conservative party accountable for their gross mismanagement.

  2. Not a pretty picture

  3. The government is asking all departments and Nalcor how to cut 30 percent. I believe in the 1930 teachers wages were rolled back 50 percent. Just show how serious the situation is.