First, let’s clear up any confusion. The downgrade in the Province’s credit rating by Moody’s, a credit rating agency, resulted not from a “highly ambitious” deficit plan, as the Agency suggested, but because the Finance Minister’s ambitions about Budget balance in 2022-23 were supported only by talk. Moody's as much as said, “talk is cheap.”
Underlying the issue is a $14.5 billion “Direct” Debt compounded by $9.4 billion of utility debt referred to by the Budget Estimates as “self-financing” — which, of course, it isn't. “Rate mitigation” — required to prevent power costs reaching 23 cents/kWh — means that the Province's $4 billion equity contribution to the project is “sunk cost”. Implicitly, that’s Moody's view, too.
The discussion of how much additional utility debt is also “sunk” awaits quantification of “rate mitigation” by the PUB. But don't expect that outcome to be encouraging to ratings agencies or lenders. Remember, too, that the debt of the Province is enlarged by the deficit in the public sector pension plans — which is omitted from the Budget Estimates. How high is the “real” Net Debt? Effectively, it is already in the$20 billion neighbourhood.
Two other points. Finance Minister Tom Osborne will have you believe that our fiscal problem is totally the fault of the crazy Muskrat Falls project. Indeed, it is a huge debt burden which should mot be minimized. But Mr. Osborne's second Budget, passed just a few weeks ago, contained the seventh deficit in a row; notable even if the first three came compliments of the Tories.
To keep the issue simple, in this fiscal year, we plan to spend $8.6 billion annually on Current and Capital (infrastructure) Account against $6.2 billion revenue. Public Private Partnerships (P3s) will also soon be a driver of Current Account expenditures, too. The new elephant in the room is "rate mitigation" which, as much as the Government might try, can't be talked away with doublespeak.
It takes no clairvoyance to figure out that the problem raised by Moody's is huge. The Finance Minister's description of the agency’s decision as “not a significant downgrade” is simply not valid. Osborne seems inured to the implication of “heightened credit risk”, Moody's ascription of our fiscal position.
The House of Assembly's short sitting in July would have been a perfect time for Members to debate our debt crisis. New Members might have gotten a dose of reality — though, on reflection, their more experienced peers have long ignored the fact that discipline, especially of the fiscal kind, requires backbone.
Possibly a few felt solace having heard the Finance Minister say, “Our lenders were not at all surprised by this.” Hopefully, some thought his remarks a disavowal of rational public policy apart from a wanton dismissal of a crisis.
This is not a game. Rating and lending agencies assess an economy’s financial metrics and determine whether they are strong enough to ensure the Bonds are paid when due. Moody's have spoken to the Province's “weak financial metrics”, the burden of rate mitigation and what they see as an “ambitious” (translated as “unrealistic”) “path to financial stability". They could not have put it more clearly.
One can parse NL's financial predicament in its most intimate detail. But the big picture reveals the problem of errant political leadership. Likely the public expects the NDP leader, Alison Coffin, to pile onto Osborne's debt gambit too.
The balance of power is more than the sum of the Government's numerical shortfall in the House of Assembly. Coffin must know that her future — and any growth in popular support enjoyed by the NDP — is inextricably intertwined with how she handles the Finance Minister and fiscal issues. She must know that the Liberals (and the Tories) would revel in the opportunity to blame her for their prevarication. That day is coming. Just wait.
Naturally, most people have difficulty understanding how the mechanism of the Bond Markets works or the conditions requisite to keeping the relationship between borrower and lender fluid. Except for those suffering the misapprehension that government is a bottomless money-pit, people do understand that, when interest rates increase (an effect of a credit downgrade), more money to the banks means less for the groceries — in this case, health care and social services. This represents the evolving debt wall towards which the Government is accelerating. A lot of people who depend on government for employment income, pensions and other benefits will suffer.
Who will deal with the mess before it is too late?
The politicians won't discuss the possibility that the debt is already beyond our capability to manage. They won't even engage in a discussion of what a reduction in spending of $1 billion or more actually looks like, even if the cuts occur over time.
This need for debate should be a drumbeat for every sector — lawyers, doctors, teachers, engineers, and especially public sector labour.
It won't happen, though.
Why?
Because egalitarianism has completely taken hold in the province. Everyone is waiting for a miracle!
