Problem is, inaction and indecision carry consequences.
Continued vacillation threatens the fiscal viability of the whole province.
Moody's, a financial services and debt rating agency, has our position in its
crosshairs. In a review released just yesterday, the Firm noted that NL's
"path to balanced budgets is at risk". They said:
It’s not a novel announcement. But the right ones are saying
it (text of announcement is provided at the end of this Post.)
The Government ought to be aware that, in failing to address
the deficit, it is risking a further credit rating downgrade. Every notch that
the rating is reduced means higher interest costs and a decline in the number
of financial institutions that will lend to the province.
The failure to act in Tuesday’s Budget is placing our economy
and society in grave peril.
The Minister's decision to ‘kick the can down the road’ was
not lost on the rating agency. After all, this was the seventh deficit Budget
in a row. Noted Moody's:
“Higher execution risk,” indeed. Could Moody’s, too, have been
thinking about the political exigencies of an election?
Of course, the Moody's statement is in stark contrast to the
Minister's. “We’re definitely headed in
the right direction,” the Telegram quoted Osborne on Tuesday. If he had thought of buying new shoes, something of a tradition among Finance Ministers, he ought to have considered a new compass instead.
By the end of 2018-19, the Net Debt is forecast to reach just
over $15.5 billion, up from $14.77 billion. The right direction?
The Total Debt will rise to $ 21.77 billion in 2018, up from
$17.5 billion. This is the real number with which the province is grappling. The
figure includes $9.7 billion utility debt, mostly Muskrat-related which the
Government falsely claims is “self-supporting.”
Osborne's was this Liberal Government's third Budget. If it ever held any, the currency of "we didn't know things were so bad", Ball's excuse for dither, has gotten really old.
Politics is about choices.
Politics is about choices.
It is about asserting a political party’s ideas. Elected to
Government, politicians are expected to establish social priorities and make
fiscal choices, all with the idea of managing public policy expectations — from
health care to roads. Instead, we have spent like ‘drunken sailors’, and few want to be reminded of its unsustainability: a fact to which Moody’s
alludes.
The “game” of politics should not be reduced simply to a
desire for re-election — unless, that is, the gamers have neither ideas nor principles.
A government with basic ethical standards will make sure that people get the
best of what they can afford, as opposed to what they want. It will ward off
circumstances that have the capacity to do society harm. The last thing
politics is about is hiding under a table.
When the Finance Minister delivers the seventh consecutive
deficit Budget, barely nuanced from the previous one except that the public
debt continues skyward, where is the leadership? Wasn’t Osborne supposed to
have brought that which Cathy Bennett lacked?
Bear in mind, too, that Moody's does not refer to the need in
2020-21 for $500 million to “mitigate” electricity rates. Likely, the Firm
might have thought that Osborne would give the issue notice. He didn't. He didn't even kick-start a negotiation with Ottawa over the necessity for "write-off" of the Federal Loan Guarantee for Muskrat, as this Blog proposes.
It is one thing to have little interest in public policy, but
there is no excuse for being cavalier with the truth.
No government has all the answers; a few are masters of public
communications, some excel in governance, others are great policy wonks. None has all those attributes at the same
time. But the Ball Administration exhibits no capacity in any of those areas.
The decision to split Nalcor off from its oil and gas division
is one example. The Minister gave no context for this policy change. The media
was left to infer one. Besides, another Crown Corporation implies another big
bureaucracy: more costs and less money for healthcare and education.
Worse, the Government didn’t even think to amend the mandate
given Nalcor. A failed energy policy — Williams’ energy warehouse concept — is
still embraced even though it has already bankrupted the province. The Throne
Speech ought to have shed some light on this move. If the split was an
afterthought, the Budget Speech provided a second opportunity. We have to
assume that Williams is still firmly in control of the Liberals’ energy
policy.
The same lack of leadership extends into healthcare, which
represents the largest opportunity to effect savings.
It extends into education. K-12 saw some policy improvements,
which cost more money. But the Liberals refused to tackle post-secondary –
which might require a review of Grenfell and Harlow Campuses as well as tuition
fees, for a start. The worst excesses in the rural school system, where organic
resettlement has decreased enrollment to the single digits, is ignored. The
crazy ferry program - in some regions - along with healthcare is helping ‘break
the bank’.
Likely, none of this matters to a Premier looking up in the
Polls.
But eighteen months is a long time to a General Election.
Moody's warning is a clarion call, to us and especially to the
Liberals.
If the Premier wants to be opportunistic there is little we
can do except protest and rob his Administration of the popularity it craves.
As to the Finance Minister, if sentiment changes as it often
does, Osborne risks serving burgers with his predecessor.
_____________________________________
Announcement:
Moody's notes Newfoundland and Labrador's path to balanced budgets is at
risk
Global Credit Research - 28 Mar 2018
Toronto, March 28, 2018 -- Moody's
Investors Service notes that in its 2018 Budget, the Province of Newfoundland
and Labrador (Aa3 negative) continues to plan to return to balance in 2022/23,
but forecasts larger deficits than previously anticipated before attaining its
goal. Moody's highlights that the deficits in 2018/19 and 2020/21 remain
elevated (8.9% and 8.7% of revenue respectively) and the budget plan faces
increased exposure to execution risk on both revenue and spending measures.
Given these developments,
Moody's considers that the province
faces increased risk that it will be unable to attain its goal of balanced
budgets by 2022/23, a credit negative for the province.
The province expects to continue
posting very weak and worsening fiscal results for 2017/18 than originally
budgeted, forecasting a deficit of CAD812 million (11.0% of revenue) compared
to the initial budget estimate of CAD778 million (10.6% of revenue). The weaker
result is primarily driven by one-time severance expenses for the year. The
province's path to balance forecasts only modest improvements in its deficits
across the first three years, declining from CAD683 million in 2018/19 to
CAD654 million in 2020/21) before recording larger fiscal improvements over the
past 2 years to achieve a balanced budget in 2022/23.
"The province's forecast to
balance the books by 2022/23 carries risks, and will be conditional on
improving economic conditions and increasing oil prices, and on the
government's ability to consistently adhere to its expenditure controls. The
province expects that the bulk of fiscal improvement will occur in the last two
years of the five-year forecast, with the fiscal balance improving an average
CAD350 million each year. The pace of this improvement would be significantly
faster than during the first three years of the forecast period and therefore
carries higher execution risk," noted Michael Yake, Moody's Vice
President.
Revenues for 2018/19 are forecast at
CAD7.7 billion, up 4.5% from the revised 2017/18 forecast as the province
continues to benefit from past tax meaures. However, over the 2019/20-2022/23
horizon, the province forecasts revenues to be lower than previously projected.
This suggests that the province has little room to move further on revenue
measures and is therefore more at risk to negative revenue shocks.
The province projects expenditures of
CAD8.4 billion for 2018/19, up 2.5% from the revised 2017/18 forecast. This is
in contrast to the planned 1.4% reduction in expenditures annually across the
rest of the budget horizon. Moody's notes that the dynamics of the spending
profile increases execution risk and will be challenging to achieve.
Economic growth, which in the province
can be influenced by activity on a small number of large projects, is projected
to decline 0.8% in 2018 and lag the average Canadian provincial growth in the
medium term. The unemployment rate is also expected to worsen, rising to a high
15.6% over the next three years. The budget forecasts average West Texas
Intermediate (WTI) crude prices of USD63/barrel for 2018/19 and 2019/20. These
projections are in line with Moody's own medium-term oil price projections of a
band of USD45-65/barrel.
Despite the larger deficits, the
province's borrowing requirements will remain largely unchanged. The province
projects new borrowing of CAD1.5 billion in 2018/19, with the, CAD1.1 billion,
in support of Nalcor Energy. The level of projected net debt as a share of
revenue is expected to remain very high within the 220-225% range across the
rating horizon.
As part of its normal monitoring
process, Moody's will evaluate the 2018 budget's assumptions, its potential for
upside and downside risks and likely impacts on the province's debt burden,
fiscal situation and liquidity profile.
Moody's research subscribers can access
the report "Province of Newfoundland and Labrador (Canada): 2018 budget
subject to significant execution risks" at
NOTE TO JOURNALISTS ONLY: For more
information, please call one of our global press information hotlines: New York
+1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong
+852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo
0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at
mediarelations@moodys.com or visit our web site at www.moodys.com.
This publication does not announce a
credit rating action. For any credit ratings referenced in this publication,
please see the ratings tab on the issuer/entity page on www.moodys.com for the
most updated credit rating action information and rating history.
