Thursday, 29 March 2018


Monday’s Blog Post forecasting a ‘status quo’ Budget didn’t exactly require going out on a limb. The Government had long ago made clear that they don’t like making decisions, especially ones that disappoint or that engender public protest; so they don’t.
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.
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.

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
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