Monday, 1 June 2020


Guest Post by David Vardy and Ron Penney



We had intended to send this to the Telegram to ask if it would publish the two parts as guest columns as it had for the first two. 

The Telegram has been very good to both of us and has published the many opinion pieces we wrote both together and individually on Muskrat Falls and other public policy issues over the past decade. In the same period the Telegram has done an excellent job though it’s columnists, such as Russell Wangersky, Pam Frampton and Brian Jones, on Muskrat Falls, and other important public policy issues, as has its reporters such as Ashley Fitzpatrick. 

The recent decision of the Telegram to suspend further columns from Brian Jones is not what we expect from the Telegram, the last bastion for freedom of the press in Newfoundland and Labrador.  

As Voltaire said “I may not agree with what you say but I will defend to the death your right to say it.” 

As retired senior public servants we may disagree with the picture he has painted of the public service, but there should be no sacred cows in Newfoundland and Labrador. 

The Telegram has succumbed to political correctness, in deference to our powerful public sector unions. Our only recourse is to condemn the actions of the Telegram and to decline to offer our opinion pieces to it in the future. 

On Saturday, May 16 and Tuesday May 19, the Telegram published two quest columns on our likely post-pandemic fiscal situation and how we might start the process of meeting the challenges posed by the dire situation facing us. Parts Three and Four expand on those ideas by setting out two approaches with specific fiscal initiatives which we and the Government of Canada could undertake. 

After a lockdown of eight weeks, beginning with the declaration of a public health emergency on March 18, 2020, the province has begun to reopen its economy, in a very cautious and prudent approach. During the lockdown our budget process has been in limbo, despite the growing demands upon government and the collapse of revenues, particularly revenues from offshore oil production. While we have yet to produce a budget, New Brunswick brought down its budget on March 10, 2020, along with a fiscal update. 

The time has come now to face the fiscal reality. A large part of that reality was facing us before the pandemic and has been accentuated by it. We are referring to a pre-existing deficit of about $1 billion dollars. To this must be added the incremental cost, on a recurring basis, of the Muskrat Falls project, which we estimate to be another $1 billion. Then there is the impact of the pandemic, both on our revenues and on our expenditures, which could add another $2-3 billion.  

We do not know how long the pandemic will be with us or whether there will be a short recovery (one to three years) or a prolonged and more painful recovery (five to ten years). Recovery from the effects of both the pandemic and the collapse of oil prices could take some time because of the added debt. 


The Dependency Model
There are two basic options. One is the politically expedient approach which places the entire burden on the federal government and absolves the province from any responsibility. Under this approach we would continue to run a massive deficit, with no end in sight, adding to the crushing burden to be carried by future generations.  

We could not possibly borrow all of this money without extraordinary federal support, including, but not limited to, federal purchase of our bonds or a guarantee by the federal government to lenders that GOC will stand behind them. It was federal intervention, through the Bank of Canada, that enabled GNL to sell its Treasury Bills just a few short months ago and, without that intervention, the province would not have been able to meet its payroll or other obligations. 
This we call the “Dependency Approach”. It recognizes that politicians may not be prepared to take any hard, politically risky decisions. These could involve tough fiscal measures, both on spending and taxation, based on a comprehensive program review. The Dependency Approach places most of the burden on the federal government. It ignores

      Tiff Macklem, New Governor BOC
the burden we place on future generations or on other Canadians. It assumes that interest        
rates will remain low and that the GOC will serve the role of “enabler” to allow us to borrow and to dig ourselves, deeper and deeper, into unsustainable debt. 

We see little evidence that the GNL has taken measures to raise revenues or contain spending. The approach taken by GNL in negotiating with public sector unions appears to be predicated on the Dependency Approach, committing to wage increases and maintaining staff levels. This reduces the flexibility of the province, moving along the path of least resistance. Will wage increases awarded to union personnel be mirrored with administrative, executive and elected public servants? 

The Self-Reliant Model
The second option, the “Self-Reliant Approach,” is one where the province attempts to reduce its structural deficit by taking hard choices, even though the savings or new revenues are not, on their own, sufficient to deal with the enormous scale of the problem. This second approach we call the “Self-Reliant approach,” where the province takes tough revenue and expenditure decisions but seeks federal support through a mutually agreed three year plan. It attempts to place our finances on a sustainable basis.  

The Self Reliance approach takes a longer term perspective and recognizes the responsibility of the present generation to avoid shifting an unbearable burden onto future generations. This is a tough but realistic approach but one which politicians are unlikely to initiate on their own, without public prodding.  

The Dependency Approach is enabled when the GOC comes to the rescue of the province by purchasing provincial bonds (through the Bank of Canada) or else guaranteeing our bonds. The rescue we witnessed a month ago was achieved through the Bank of Canada’s purchase of Treasury Bills, which provided short term relief.  

It remains to be seen whether the federal government will extend this approach by purchasing longer term bonds, thereby creating greater long term stability. Will all provinces be treated alike and will there be penalties or limits for those provinces who borrow too much? 
Deficit reductions for the province: What measures must we take? 

If we are to follow the Self-Reliant Approach then we have to be prepared to take action to reduce our expenditures and to increase our revenues. What are the options for GNL?  A comprehensive program review of the entire public sector would be needed to answer that question but we can identify some of those options. 

The previous PC administrations adopted a policy of investing equity into oil and gas developments. Up to this point in time over $1 billion has been invested and commitments have been made for further investment. The Liberal government has continued with this approach and, along the way, have created another administrative apparatus, the Oil and Gas Corporation.  

The province should strategically terminate these investments and, over time, liquidate its investments, while dismantling the Oil and Gas Corporation. It was never a good idea to take an equity position in oil. It is inherently risky, as we are now finding out. We should take our share in royalties and let the oil and gas companies take the risk. 

Before the creation of Nalcor Energy the province had one Crown Corporation, NL Hydro, which generated electrical energy and operated high voltage transmission lines. NL Hydro also distributed power in rural areas of the province, while Newfoundland Power, an investor-owned utility, distributed power throughout the rest of the province, including the more densely populated Avalon Peninsula. With the completion of Muskrat Falls NL Hydro should take over from Nalcor, which should be dismantled, along with the Oil and Gas Corporation.
A thorough review of our expenditures is required, focusing in particular on the two largest components, health and education. While it may not be practical to target the national per capita average spending there should be a rationalization of our system to achieve substantial savings in health and education.  

Much of the growth in public administration since Confederation has taken place in crown corporations. These agencies now need to be reassessed and government needs to be dramatically downsized. Health and Education boards have been consolidated to the point where regional input from citizens has virtually disappeared. 

It is time to dismantle the boards and place the responsibilities back into government departments. In addition there should be a complete restructuring and downsizing of governments, including all departments and agencies, some of which can be transferred to the private sector, such as the Liquor Corporation. 

Memorial University has grown in recent years by offering low student fees to both resident and international students. Our high student enrolment appears to be sustained by deep-discount tuition relative to other Canadian universities. The needs of our own residents suggest that a smaller student body would be appropriate. Tuition for international students should be comparable to what they pay elsewhere in Canada. Is this really the time to create a new Law Faculty?
Editor's Note: Part 4 will be posted on Thursday, June 4, 2020.