In the political arena, the mastery of synthetic truths is
claimed by far too many.
Ball himself is well-known for the deceptive arts, having
feigned innocence over the approved gold-plated boot in the derriere for Ed
Martin. Last year he upped the ante with the assertion that neither taxpayers
nor ratepayers will take the hit for the $12.7 billion Muskrat Falls project.
At Rotary, the Premier went gaga over the Conference Board of
Canada’s forecast that the Province will lead the country with 5.2% real GDP
growth in 2019. Ball even counted the GDP forecast among his accomplishments. Does this latest
claim crash the bullshit meter? Of course not; it’s just that, like the
self-proclaimed deficit slayer in the Finance Ministry, the Premier is not
above invoking statistics when lies and damn lies won’t do.
For those readers who did not study Economics 101, or nodded off during lectures on the dismal science, the GDP represents the size of an economy. The real GDP growth rate is the inflation-adjusted value of all the goods and services produced by an economy in a period of time, say a year. It is one of the primary indicators used to gauge economic health. Bond rating agencies use the debt-to-GDP ratio as a benchmark to establish a nation-state’s ability to repay debt. For business, the annual GDP growth forecast may influence the timing of an investment; governments and central banks use it for public policy purposes.
But like many statistics — especially in a small economy like
ours — the GDP growth rate has huge potential for distortion. Even knowing that
fact, politicians will use it mercilessly to their political advantage. A dull
Opposition will let them. The Conference Board in Canada Exhibit (below) showing the percentage change in real GDP for
all ten provinces illustrates the point.
You might well ask: how is it that NL, an economy struggling after
a decade of massive stimulus from three megaprojects, historically low interest
rates and a residential housing boom, can lead even a perennially buoyant province
like British Columbia? Is there evidence that our economy is so robust that
every other province’s forecast growth prospects are only half or less than those
attributable to NL?
Let’s take a closer look.
Only recently, Finance Minister Tom Osborne released a provincial real GDP forecast of 2.1% for 2019. The private sector average forecast (mostly
from the banking sector) was 2.2%. The Government’s figure
was based upon data prepared for the Fall Update released just a short time ago: November 6, 2018. The Conference Board’s forecast arrived just five weeks
later, on December 12th. Strangely, while the Premier was happy to
both quote and claim credit for the more optimistic number, he made no attempt
to reconcile the two forecasts.
Noteworthy, too, is that the Budget Update was based upon
growth in oil production from 84.7 to “roughly 92 million barrels in 2019”, an
increase of 9.2%, due mostly to the ramp-up in oil production from the Hebron
oil field. The Update also upped the average price obtained for Brent crude
from Budget US $63 to $74, offset by a slightly lower $USD. It even acknowledged
the rebound in the value of iron shipments, the decision to go underground at
Voisey’s Bay, and the South White Rose GBS. The Cook Aquaculture investment
wasn’t mentioned in the “Major Forecast Assumptions” document, but it is referred
to in others.
So the provincial forecast did not miss much, if anything,
leading us to conclude that it relies on others for the GDP calculation.
With most economic categories in negative
territory, it fell to the oil sector to goose the GDP number. Bearing in mind
that the 2.1% GDP forecast already reflected a significant growth forecast in
the value of oil production, it is not hard to conclude that the Conference
Board’s total growth forecast was even more heavily weighted towards the value
of oil.
When very little of this commodity is processed here or is in any way
integrated into our economy except via the services and supply, there are good
reasons why offshore oil production, as expressed in GDP, is a very imperfect reflection
of local economic growth.
Oil is a fickle commodity. Oil prices fluctuate and unforeseen
events impact total annual oil production.
Oil platforms are highly capital-intensive and, except for
royalties and current employment associated with oil drilling and supply services,
construction of the capital infrastructure has been reflected in the GDP of earlier
years. In the case of Hibernia, it was the 1990s.
There are other reasons, too. The interest and
return-on-equity paid on the invested capital is made to banks, bondholders and
investors worldwide. The local spin-offs and employment represented by the
value of exported oil pales in comparison to a dollar invested in the fishery,
forestry and pulp and paper industries.
One more measure of why it is risky to be blasé about oil’s
influence on our GDP is that its value is impacted not just by the
international benchmark price for each grade of oil, but also by changes in the
value of the $USD vs. the $CD.
Essentially, this relatively large industry produces oil which,
for the most part, never touches our shores. Most of the cash flows never
circulate through the local economy either.
It remains to be seen whether even the Conference Board’s misrepresented
forecast will hold up. The Board credits Hebron oil production for the “18 per
cent” growth in the oil extraction industry. As a reminder, the Province won’t receive royalties from this field for a long time.
The Conference Board properly notes that “employment growth
will be short-lived in 2019, returning to negative growth in 2020”. In effect, the
Board disengages the oil industry from the critical issue of employment growth
with which GDP has a very strong relationship. Rotarians didn’t hear the Premier
offer any such clarification. (For reference purposes, the Conference Board's NL economic highlights contained in its December 12, 2018 Report are listed in the Exhibit below.)
It might interest the reader that the provincial Department of
Finance actually uses a GDP metric that attempts to screen out some of the oil-induced
distortion from the GDP. Unconcerned about politics, the bureaucrats need a
more realistic indicator to assess an array of public policy issues. But, in an
election year, don’t ask the Premier or the Finance Minister what that metric
is called or how it is calculated.
I would also suggest that if NL’s economy was relevant in the
total Canadian context, the Conference Board might have taken the time to
address this issue, or at least give the provincial GDP figure an asterisk,
denoting a warning to readers to use the figure carefully and with context.
Of course, those issues are unrelated to a Premier only too
willing to grab ownership of a fundamentally fictional economic growth forecast.
Governments have always taken far too much credit for the
creation of jobs and far too much blame when the employment rate declines. The
Ball Government is no different than any other in that respect. Crazy is when
governments pretend that they can work magic, when a truthful narrative might
win them the political credibility that they crave.
Had the PR types in Executive Council been part of a political
culture that eschewed deception, and if they were more creative too, they might
have noticed that there is a sounder narrative to be found around the jobs
figures than in the most recent GDP forecast.
When the current government came into office in December 2015,
it faced a seasonally-adjusted unemployment rate of 14.0%, according to labour force statistics published by the Provincial Government on January 4, 2019 using Statistics Canada stats. The rate posted by the Agency at the end of December 2018
was 11.7% (15 years of age and over, both sexes). The figure contrasted with 14.5% contained in the Provincial Government’s
2018 Fiscal Update. Granted, Stats Canada indicates that the NL workforce shrunk
by just over 13,000 people from 2015-18, reflecting both a mobile economy and a cooling megaproject
economy. As always, context is
everything.
While we rightly criticize the Government for not having right-sized
the public sector, on its face, having regard to our history and demography, an
11.7% unemployment rate is nothing to be ashamed of. It’s just that the truth can
give transparency an unwelcomed intrusion. For example, a modified (some call
it “non-oil”) GDP forecast would make our provincial debt-to-GDP ratio look even
worse than it already does.
Still, a skilful politician would never have grabbed a fiction
when there is something better on tap to boast about.
Perhaps, for that reason, when the Premier warned the public at
Rotary to ignore “noise and fiction” in an election year, the advice might
have been better directed not towards his political opponents, but to himself.