Monday, 16 December 2019


The Government’s Fiscal Update released last Wednesday by Finance Minister, Tom Osborne, depicts a government continuing to lead the public over a steep fiscal cliff.
The decline in revenue of $393 million, which the Minister announced, is not in dispute. But his press statement to the effect that the Budget surplus for 2019-20 has been reduced by $368.7 million is transparently not true. The Government is running a seriously large deficit - not a surplus.
Osborned is engaged in a process that is worse than double counting.
The Budget Speech brought down in March refers to the new Atlantic Accord agreement with the Federal Government in which fixed cash installments totalling $2.5 billion will be received from 2019 until 2056. The Speech notes that in 2019, “we will receive $134.9 million from the first installment.” (Bold added) The Minister is attempting to create the illusion of budget surplus by assuming that the entire sum of $2.5 billion has been received.
Osborne is delusional in others areas. His Budget uses the most favourable construction possible in allowing oil royalty forecasts that make no margin for error. He ought to know that natural resources revenues, especially from oil, are only a best guess anyway. Prudent fiscal management would employ a highly discounted forecast measure; but prudence is not something with which we can characterize this Administration or any other in the past decade. 
A couple of examples illustrate the seriously misleading character of the 2019-20 Budget and the Update:
1.  The Fiscal Update states: “Shutdowns of the Hibernia project in July and August caused an estimated deferral of $185 million in revenue for this fiscal year.” To begin with, this is not deferred revenue. Deferred revenue is money received in advance of having earned it. It cannot be treated as income under generally accepted accounting rules. This is lost revenue that may or may not be recovered depending on whether the Hibernia reservoir is fully drained at some distant time in the future. His Finance officials know the difference.
That there will be shutdowns of offshore platforms is no surprise; Hibernia is the third production platform to cease production for a period in little more than a year. It’s just that Osborne’s Budget refuses to account for such anticipated occurrences.
The Update also states that “lower than anticipated oil prices is expected to reduce  revenues by $46 million”.  This, too, surprises the Finance Minister, when it shouldn’t. As to the likelihood of continued fluctuations, the Minister need only open his office door and ask anyone who has oil and gas securities in an RRSP.
2.  The cash requirements stated in the 2019-20 Budget Estimates (Statement 1, page iv), exceeds revenues by $1.86 billion. With the Minister’s Update telling us he will receive $368.7 million less, the “real" cash deficit – Capital and Operating Expenditures -  is now therefore $2.23 billion. 

A 2019-20 $2.23 billion “gross cash requirement”, AFTER having received the $134.9 million Atlantic Accord funding, might just lead one to ask: what aspect of the Budget is under control?

For those on Twitter who raised the subject over the last few days as to the severity of the province’s debt problem, I thought it worthwhile to take another look at this issue, too.
An understanding of the issue is found in the Government’s “Gross cash requirements” for each of the last five years set out in the Report of DBRS - an agency that rates the Government’s Bond issues. The “cash” deficit is actually the amount that the Government will have to borrow to meet its forecast expenditures. It is the amount by which the debt is increased. The only positive thing we can say is that the problem predates  the current Administration. But, as you will see below, this Finance Minister has made no move to fix the problem. 

Here is the Government’s cash deficit for the most recent Budgets, according to DBRS:
      2015-16          $2.6 billion
      2016-17          $1.7 billion
      2017-18          $2.0 billion
      2018-19          $2.0 billion
Provincial Debt Another Fiction
The Provincial Debt is yet another of the Finance Minister’s fictions. His Budget Update puts the Provincial Debt at $13.95 billion up from $13.77 billion in April. In contrast, DBRS, the Bond Rating Agency, calculates province’s “self-supported debt” at $19.194 billion. (This is, in part, because DBRS includes the unfunded pension liability in its “self-supported debt” numbers, something that the Government won’t.)
To the $19.194 billion “Self-supported Debt” DBRS adds $9.375 billion of “Hydro Debt” (which includes provincially guaranteed debt of NL Hydro and federally guaranteed debt of Muskrat Falls). Of course, we know that the Muskrat Falls debt must be “mitigated” by someone other than the ratepayer - which makes it “taxpayer-supported” debt.
So, DRUMROLL PLEASE…..the numbers are in! The total Debt for which the province is on the hook is $28.5 billion + $368.7 million (the drop in revenue contained in the Budget Update) or just short of $29 billion (recognizing a substantial write down of the Muskrat Falls asset). 
Why, readers, $29 billion is more than double the Debt figure reported by the Minister!
The Minister also told the media that he “wasn’t giving up on our return to surplus in 2022-23...” 
Tom Osborne thinks that we believe in Santa Claus, too.
(Note:  The Provincial Budget for this year reported the Total Public Sector Debt as $22,857.7 billion but Note 3, Appendix III, Public Sector Debt, warns that the figure "does not include payables and accruals, or unfunded liabilities related to pensions, severance or post-retirement benefits.") It is reasonable to conclude that DBRS has no vested interest in low-balling this Province's debt position.