THE 'ADVISORS', 'BOOSTERS', AND 'SHILLS'

Last week the Minister of Finance confirmed what everyone knew: lower oil prices are a wrecking ball for the 2014-15 provincial budget. While no one forecast $60 Brent crude, equally we should not be surprised. Events such as this have long been a feature of resource based economies.

When we say commodity demand and prices are ‘cyclical’ that doesn’t mean they go up and then go up further.  Prices fall, too, often hard and precipitously. Anyone who has invested in the stock market has felt the euphoria of conquest. But nothing always stays the same. When the market turns, the whiplash of price swings guarantees that those having danced with, and perhaps married risk, get stung. The markets do not discriminate between the well-intentioned, the prudent and the foolish.   

The word “prudent” made its way into the Finance Minister’s budget update. Said Ross Wiseman, “In the shorter term…we have to be prudent and adjust our oil price forecast for the remainder of this fiscal year.” The word has no meaning for this Minister; short or long term.

BUDGET UPDATE: LEADING FROM THE REAR

Ask yourself this question: if the investment firm that manages your RRSP placed 33-50% of your money in the volatile commodities market, i.e. oil, would you not, at least, question its competence?  Likely, you would move your funds elsewhere. 

The Provincial Budget is annually predicated upon consistently high returns from the same volatile commodity.  NL has been bestowed a valuable natural resource; but we do have the responsibility to carefully manage its inconsistent value.  The international oil market is constantly under pressure and hence subject to significant price changes.    

For those reasons, just as we would expect a portfolio manager to insulate our most important investments from excessive risk, the Finance Minister ought to be guided by a set of policies that protects the public purse against the worse effects of volatility.         

The 2013-14 Provincial Budget Update delivered by the Minister, on December 2^nd 2013, was a reminder that this Finance Minister is comfortable leading from the rear.  He has made it clear he plans no reform to the Public Service Pension Plan though the annual unfunded liability continues to mount. 

He will run deficits in a time of plenty.  He will do anything but make necessary financial decisions.  Now, he has acknowledged that changes to the current budget deficit, found in the Update, are purely accidental.