Thursday, 1 December 2016

A TALE OF JETHRO BODINE IN THE PREMIER'S CHAIR

If you read last Saturday’s Telegram containing the James McLeod story “Ball falls, gets back up” you might be left with the impression we shouldn't worry about the province’s fiscal problems. How Ball actually "gets back up" is unclear. But equally doubtful is Ball's description of how he plans to get the budget back to balance: The Telegram paraphrases the Premier:

“The government has already hiked taxes basically as high as possible in the spring budget, so over the coming years it will need to cut roughly $100 million per year to get back to balance by 2022.”

Hold it there! The budget update confirmed a deficit this year of $1.58 billion. That is just the deficit on current account – or as some refer to it the grocery money. 

Even Jethro Bodine - the dimwitted nephew of Jed Clampett’s 1960s ‘The Beverly Hillbillies’ TV series - wouldn't need help with this problem. It is obvious that at the rate of a $100 million annually it will take “roughly” 16 years, possibly out to 2033, to “get back to budget balance” and then only with respect to the current account.
No one even talks about the Capital Account and this year, alone, the province will borrow nearly $1.7 billion for capital purposes including for Muskrat Falls - as if it doesn't matter how the government is loading up the "total debt" problem. It doesn't talk about it. And almost no one asks about it.

Of course, while a relaxed and unconcerned Premier is engaged in high level financial repartee with an ink slinger, the Auditor General (A-G)  is on the rubber chicken circuit calling attention to our unsustainable fiscal problems.  

Unfortunately, the A-G is timid - distinguishing, as he does, between “total debt” and “net debt” when - even if limited by the arcane rules of the Financial Administration Act and his profession - he should be shouting that there is little bloody difference. You won't find the bond markets make such a fine point!

At the risk of boring you with lengthy definitions, it might suffice to know what “net debt” does not include. For example, “net debt” does not include capital expenditures 
(infrastructure) and does not include monies borrowed for Muskrat Falls. 

And the “net debt” does not include the debt raised for crown corporations, agencies, and municipalities.

The net debt is reduced by the "equity" in those crown corporations, mostly the amount attributable to Nalcor - which, in a private sector entity, would be substantially written off for all the reasons we know. Those figures - because they are large and unsupportable by a sound investment thesis i.e. Muskrat  - need to be exposed rather than obscured.

The "total debt" forecast for the 2016-17 fiscal year is $15.7 billion (up from $6.8 billion in 2012). On the other hand page 33 of the Consolidated Accounts of the Province (2016), prepared by the Comptroller General's Office, records our total liabilities as $19.334 billion. 

At the rate we are racking up all forms of debt obligations, the public should expect those figures to grow. According to the Frazer Institute, a think-tank, the "total debt" figure will reach $22.9 billion by 2020/21.

Those numbers confirm we are a long way from budget balance.

It is one thing for Premier Ball to play Jethro and to get his “gazintas” wrong, but he also forgets that the interest on the "total debt" threatens to outstrip his proposed savings. Ball’s approach is a treadmill – which will leave the province in a far worse position than he suggests..

Let’s put it a different way – if "investments" like roads, bridges, schools, etc. do not generate revenues, from what source is the capital and the interest thereon to be paid? 

It is not difficult to see - and the Premier should acknowledge the fact  - the term "net debt" is simply a fiction. 

In truth, the Ball administration has no handle on our fiscal nightmare – neither capital account, current account, nor that of crown agencies, like Nalcor. 

In addition, the A-G commits a fatal flaw in accepting that the government's commitment to balancing the budget is a starting point for his own warnings about the debt. It is hard to understand why he would make that choice especially since he has been witness to fiscal plans by successive tory finance ministers - each one having seriously missed stated fiscal targets. 

Still, the A-G should be commended for his effort's even if he is far less raspy than the occasion deserves. His exhibits show a disturbing trend which magnifies our real fiscal circumstance. 
  
They illustrate NL's precarious debt picture - one that cannot hide the accelerating effect of borrowing costs as a result of persistent increases in all forms of debt - "net" and otherwise. It is just  too bad the exhibits don't include a depiction of the "total" debt forecast.

Still they are instructive. 



The government plans to roughly maintain "Program Epenses" at current levels notwithstanding inflation.


Note "Debt Expenses" (mostly interest costs) continue to climb each year to 2023 - though the government claims it is in control.


The "Net Debt" continues to rise until 2022 when Ball claims the achievement of budget balance.


The Fall Supplemental Budget (noted below) is forgotten in the wake of Ball's declining popularity.


The next three Exhibits demnstrate how difficult it will be to achieve budget balance - as proposed - given the forecast financial climate. When the government makes an inadequate beginning - not having had the courage to wield the fiscal ax - the challenge just get larger every year. Declines in capital investment, employment, including the job engine - housing starts - will impact government revenues as the next three exhibits demonstrate.




It is not clear if Ball's immigration target are reflected in forecast population decline.


Then there is the problem of an aging demographic which speaks to a multitude of issues especially healthcare costs - which need to come down, not go up.


Based on evidence represened in the next Exhibit, health care costs are far more likely to climb.


In summary, the Premier's assertion that he needs to cut "roughly $100 million annually" to get to budget balance by 2022 - having budgeted an operating deficit of $1.58 billion - is simply not doable. Ball ignores the seriousness of the total debt picture. He can't even acknowledge the $1.7 billion budgeted for capital account, including for Nalcor or the inexorable rise in debt service costs that seriously diminish his own tepid efforts. 

This is the record of a Premier luring the province into a false sense of security. He not only gives the impression he is on top of the deficit, he would have the public think that our enormous debt problem can be resolved without massive cuts and a restructuring of government.

This Premier has nothing to celebrate after one year in office. I'm afraid the that the public has even less.

22 comments:

  1. Des this is a chilling overview of the state of the fiscal health of NL going forward.

    The unprepared Ball government has chosen smoke and mirrors to deceive rather than come to grips with the reality. They fell flat on their face with the spring "update" and chose inaction and deception as the strategy going forward.

    They hope the fog they generate will keep the populace placated through at least one more electoral cycle. As you point out the result will be crippling. The impact and the demographic composition will in all likelihood be worse than the projected figures. The flight of the able from an oppressive tax burden will reduce the working age population more than projections and make the problem even more dire.

    It is a tragedy that the opposition is non existent and indeed a large part of the problem.

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  2. As me murder says "What odds."

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  3. Excellent summary of the province's dire fiscal situation. Well done Des. Maurice Adams

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  4. Sad thing also is this: many read this blog, but very few will comment(other than a few regulars) as being aware of the dire situation we face. All these professional well educated people who keep their mouth shut ( and many of those who benefit from this Jethro level leadership). Ball smiles and tries to assure all in well, while speaking horseshit.
    On the island we have electrical generating and transmission build up over 50 years and has a value of 3 billion dollars. To offset 11 percent of our energy needs, now produced from Holyrood oil burning in winter, we will incur some 15 billion in expense for Muskrat( that at best can deliver only one quarter of the power of our existing assets valued at 3 billion dollars). This 15 billion MF, with associated interest expenses, and find we have a declining power need here, and little export power from this, and no doubt reduced power reliability. World class leadership or Jethro level? Uncle Gnarly is spot on.

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    1. The courage of ones convictions needs to manifest in action. Posting anon belies your concerns.

      Stand up, Act up!

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    2. See what i mean, Bruno.......... a few regulars comment.

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    3. Yes and you feel the need to hide behind your keyboard. How does that help?

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    4. I am a regular reader of this blog and I want to stand up for what is so important to future generations but I have already been threatened by officials in the justice system that me and my family will be punished if I speak out publicly.

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    5. I am a regular reader of this blog and I want to stand up for what is so important to future generations but I have already been threatened by officials in the justice system that me and my family will be punished if I speak out publicly.

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    6. Churchill said "you have nothing to fear but fear itself". Courage is contagious and it is empowering. See what Jim Learning accomplished and how support mushroomed on the front lines?

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    7. I'm also a regular reader and agree whole heartedly with al l sentiment. BUT. I work for the government and we all know how they go after people who speak out. Sorry Bruno, but my family comes first. I will not risk my job to publicly speak out. that being said anyone in my circle knows my thoughts on this project...I tell everyone that will listen. cheers. :)

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    8. A couple of questions. Do you live in a democracy if you fear speaking out about the fiscal and ecologic disaster looming?

      What then would you call politics in NL? An Oligopoly? A feudal fiefdom? Do you enjoy bowing down in fear to the Oligarchs? Does it make you feel free? Do you have any self respect or is that the cost of your employment?

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  5. Well Bruno I certainly don't hide and I've pay my taxes faithfully for all my adult life so it would take a bullet to shut me up or to hide .......Des your wisdom shines on my friend but comparing this premier to Jethro Bodine is an insult to the hillbilly clan for sure....You couldn't find a crowd of hillbillies as bad as this bunch and put them in suits if you wanted to......Smoke and mirrors got nothing on this crowd...God help us all..... my generation will never live to see this mess go away....

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  6. As a people we have to stop expecting politicians to get us out of this mess, they do not have the decision making ability to solve such issues. We need to collectively take action and force their hand, how do we band together with enough force to make changes happen is the real question at hand?

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  7. "At the rate we are racking up all forms of debt obligations, the public should expect those figures to grow. According to the Frazer Institute, a think-tank, the "total debt" figure will reach $22.9 billion by 2020/21."

    It'll hit that figure within 24 months.

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  8. As ever, you are spot on Des. 'Tis a sad state of affairs we are in and an even sadder state...is that there is no one "better" chafing at the bit to take on the task MR Ball and team seem so I'll suited for. THAT is the true nightmare.

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  9. Just a question out of curiosity. What happens if the province defaults on its debt? Some countries have had the IMF step in and impose severe restrictions on their economies. If Nfld. defaults will the federal government "bail us out"? Mr. Sullivan, could you comment on this. Love your Blog, by the way.

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    1. First, the hope is that the political leadership will muster the discipline to forestall any such outcome - and that the public will give them support to find the courage needed. Likely, this government, like the last one, is hoping that OPEC will get its act together and do the job for us by boosting oil prices and revenues - that's essentailly the solution proffered by MUN economist, Dr. Wade Locke - one to which I do not subscribe. To answer your question directly, the prevailing view is that if the bond markets refuse to lend us money - a more likely scenario is that the cost of borrowing will get too expensive - the Feds will step in - guarantee our bonds while we undergo some fiscal repair. Likely it will force adoption on the province - as a condition for having stepped in - the fiscal measures we now refuse to take. The answer is purely speculative and I welcome other views on your question.

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  10. Power consumers in NL need to take a hard look at their personal energy needs vs their respective incomes. A 1,000sf 2 bedroom apartment in BC costs approximately $700/year including baseboard heat. Assuming fixed income seniors, (2), say $30,000/yr, that works out to roughly 3% annual income. With rising power rates in BC, many are moving towards "zero net energy" construction, and conversion from natural gas/electric to ground source heat pumps. The message to NL ratepayers seems obvious. You are not required to subsidize the Power Company, in its Muskrat folly . My peer colleague Adams, P Eng has it well analysed.

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    1. Whether or not we pay the future absorbitant rates for power or we pay on increased fees and taxes, one way or another we will pay. Putting it bluntly---we are screwed!! Those who simply cannot pay the 0.22+ c/kwh will be subsidized and the remainder of us will pay for them.
      I find it astounding that our illustrious "heads of state" were able to do what they did and get away with it.
      Contrary to Mr. Williams' claim that this is a good project for NLers, what good is it if we can't pay for it??--owning a diamond mine in Africa is a good project too but we can't pay for that either.
      Mr Williams,Ms Dunderdale and Mr Ball should be forced to explain how producing power at a cost of more than we can sell it for, is a "good deal" for us.
      For the love and honour of God, please stop this madness and cut our losses.

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    2. Cutting our losses it the appropriate response, since Marshall cannot show how continuing adds any value. It doubles the boondoggle. Cutting our losses means putting MF on ice. A boondoggle at 7 billion, a boonboondoggle at 14 billion.....how does this make sense. If Marshall had within a few months showed ow the economics of this project could be turned around, then one might reconsider. But he has not shown a single thing to put the economics on tract. Marshall chance to demonstrate otherwise is time up. Marshall has not even put lipstick on this pig, though he has tried (by saying the loss of the court action with Quebec had no negative effect, and that no one has ever suffered from mercury poison). So, he is little different than Ed Martin.

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  11. Readers should also check out the latest Independent Engineer's July 2016 site visit report (and don't forget to look at the photos of the North Spur) http://muskratfalls.nalcorenergy.com/wp-content/uploads/2013/03/Muskrat-Falls-Project-July-2016-Site-Visit.pdf Maurice Adams

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