Monday, 14 December 2015


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.