Your Health. Our Priority. Maybe Not.

GNL Budget 2023 fuzzy on financial details

First of a series on aspects of the GNL Budget 2023

“Under the leadership of Premier Furey,” finance minister Wendy said of Premier Pan last Thursday, “we have done what many said was impossible.”

Fellative words clacked out by some bureaucratic or political staffer and stuffed into a politician’s mouth appear to be free of charge. Like the budget itself, the appearances are deceptive.

They deceive the fragile political ego they stroke. They deceive the people reading the documents or listening to the speech. 

Supposedly, this is the “fourth [budget] with Premier [Andrew] Furey’s leadership and it sets a solid plan to ensure a stronger, smarter, self-sufficient, and sustainable Newfoundland and Labrador.”

No one with a clue ever said lowering net debt was impossible.

That claim in finance minister Siobhan Coady’s speech is not merely made-up.  It is not exaggeration for effect. It is false. But in the speech it is sets up for the list of Our Dear Premier’s accomplishments as a financial wizard.  Truly his talents know no bounds.

We have lowered the net debt – forecast to be $17.1 billion in last year’s budget with effort, focus and solid leadership it is now $15.7 billion – a $1.4 billion decrease. Our deficit has turned to surplus for 2022-23 with an achievement of return to balance earlier than forecast. As well your government supported you with over half a billion dollars in cost of living measures. And, we started a Future Fund. Taking non- renewable resources revenue and putting money away for the future.

Since the first of the Dan dynasty – the original Our Dear Premier - people have grown so used to this North Korean bullshit no one bats an eye. It is baked into how government works.

But it is bullshit.

Lowering net debt is not impossible. In fact, it’s quite easy. As easy as raising it.  Net debt has gone up and down like the proverbial’s dog’s stomach for the past 20 years. Friggin’ around with the net debt to make it go up or down is so common that the same budget that Wendy delivered in praise of ODP Pan includes the promise to *raise* the net debt next year. 

All hail the mighty Furey!  Debt lowerer and debt raiser.  Behold his awesome powers.  Of course, the bureaucrat or political staffer who smashed together the words Coady read – it’s too poor a job to call it writing – didn’t mention that net debt increasing thing but it is in the budget documents.  Facts destroy the story they made up so out the window with the facts, evidently.

Out the window is where this notion of net debt should go, too. Net debt itself is a bullshit idea. It is meaningless as a sign of government’s financial health or the fiscal brilliance of whatever crowd is running the place at a given moment. Your humble e-scribbler pointed this out a decade ago. Interestingly enough, so did the gaggle of experts headed by Moya Greene that Premier Pan appointed to chart the way out of the financial mess the provincial government is in. Furey and Coady and the rest of the Liberals are supposedly following their plan yet here they are not following the plan or the ideas in it.  You cannot understand that net debt is a useless idea and at the same time use it to fool people into thinking the Premier has performed some loaves and fishes miracle. Yet, there the Furey-led Liberals last week saying two contradictory things at the same time.

Yay, hooray.  Our Dear Premier has lowered the net debt. And at the same time, “[bond] Rating agencies understand net debt,”  Greene and her bunch noted, “ but the discussion around net debt really masks the true [financial] problem.”  Net debt is everything the government is liable to pay – borrowing, pensions, and the like – less the assets it could use to pay the liabilities if it needed to do that. As Greene and her crew noted, “approximately 78 per cent of the province’s financial assets are not easily turned into cash to pay our obligations.” 

Not easily sold off for cash. Not likely to get the value for them the government lists on its books.  Lots of problems with net debt.  And at the same time,  it doesn’t have anything to do with how much money you have to pay every year just to cover the interest on all your debt.  If you borrowed a half million for a house and had no other debts, on paper your net debt would be zero. Liability = $500K.  Asset (the house) - $500K.  But you still have to pay the bank back the money for the house plus interest over at least 30 years.

So, no big deal.  Well, in itself, just political self-excitement.  A bit of onanism.

The problem is that this sort of thing is part of a pattern in government and has been for 20 years.

Paying the interest on your mortgage is called servicing the debt.  The government reports its version of paying the mortgage in its annual budget.  Well, the government used to report it. They still do, sort of.  Thing is that starting  in 2021 the finance department changed the way it reports the debt expense in the budget. The official line is that they used to report it the wrong way but are now reporting it the right way. A plausible explanation on the surface but once you look a bit wider and deeper, your nose might start twitching a bit.

You see, there was no note about the change in the 2021 budget or any one since. Not a peep. Which is weird because budget statements should report any financially significant change. Look at the chart at the beginning of this column. It shows debt expenses the way the government used to report it from 2007 until now.  If you accept the current presentation, then the government is able to carry around more than twice as much debt as it had in the early 2000s and the cost of covering the expenses for that debt are about the same. Less than 10%. Not likely.  No miracles happened.

The government budget now reports something called Debt Servicing Costs in the handy chart everyone looks at to see what share of money is going to what pile. For 2023, that number will be $722 million or about 8% of spending. In 2020, the line in the budget was called Debt Charges and Financial Expenses. It had been about a $1.0 billion in 2019 and was forecast to be $1.5 billion in 2020. 

Over the next couple of years, the cost of servicing the debt supposedly fell to almost half of what it had been.  Second biggest expense of government down to third and the amount involved a fraction of what it had been. That’s a material change or looks like a material change but no one said boo about it.

Let’s look at some other events to understand what seems to have happened.

In March 2020, the government couldn’t sell its last batch of bonds for Fiscal Year 2019.  Dwight Ball was Premier.  He wrote a panic letter to the Prime Minister saying we were out of cash.  A week later, finance minister Tom Osborne walked it all back as if nothing happened. At the time, it looked like a COVID response by the Government of Canada saved everything.  The Bank of Canada started buying up provincial debt to get everyone through the disruption caused by the pandemic.

What we also know now is that the provincial government’s sinking fund bought that last bit of debt the provincial government needed for 2019. The sinking fund is supposed to be a pile of money invested to pay off debt. It’s unheard of for provinces to buy up their own debt on first issue. They do buy up their own debt on the secondary market sometimes, usually just to make sure they don’t wind up with a pile debt coming due all at once. But buying up a first offer is really unusual.  And it’s a bad financial sign.

Again, as with the change to how the government itself reported the debt expenses, there was nary a word of this little episode to anyone publicly. No notes in the budget and no notes in the sinking fund’s own financial statements.

In 2023,  we learned from the Auditor General that the committee of bureaucrats that manages the sinking fund stopped preparing records of its meetings and decisions in 2020. No minutes for three years. No minutes means no trail of accountability.  

The government gets into a financial jam. Changes the way it reports the budget with the effect of making its debt expenses look smaller than they actually are.  There’s no mention of the change even though it materially affects the way government’s financial state appears. It  buys up a first issue of some of its own bonds because the market won’t take it at the interest rate offered and the committee responsible managing the government’s sinking fund stops taking minutes.

Too many related things to be a coincidence.

Just to be clear, the chart above used the figures as reported for every year up to 2018.  For 2019 to 2023,  the debt expenses figure is a combination of two separate lines in The Estimates. One is from Exhibit II and the other is from Exhibit IV.  The number you get might be closer to the way the budget used to report the numbers.  It could be off, but not likely by much. But without an official explanation and a statement of the correct numbers, this will have to do. 

As a check on the accuracy of this approach, compare the total debt expense figure for 2022 and 2023 ($1.8 to $1.9 billion) to the figure Coady used a couple of weeks ago in London:  $1.7 billion  They report only $700 million plainly in the budget but actually spend another billion on top of that.  If the figures in this chart are not bang on, then they are close enough given the similarity to the figure the minister used public.  She’d have seen it in a briefing note or been given it in a briefing.  It’s not a number she could find easily.

The chart at the top of this column shows debt expenses as a share of government income.  Not as a  share of spending, which is the way government shows it.  But income. You can make your debt servicing shrink as a share of spending by just spending more. Income doesn’t change as easily.  Plus, debt servicing is one of those fixed expenses every year.  It’s hard to make it go down.  You have to deliberately pay off loans and not take more. A good indicator of financial health is how much of your income goes to servicing your debt. Not getting rid of it. Just covering the interest.

The magic number is 25%. Marked by a red dashed line.  In his 2012 paper on provincial debt loads, Marc Joffe used this measure as an indicator of a province’s risk of defaulting on debt.   He gave “historical examples of default risk being quite high if more than 25 per cent of a province’s revenue take is required to service debt.”

No province was above 10% at the time.  Less than a decade later and Newfoundland and Labrador was headed into that high risk territory very quickly. You can understand why a government might be interested in re-casting its budget figures as its debt load climbed and the government wasn’t doing anything to change the pattern of overspending by billions each year.

Joffe highlighted two things about Newfoundland and Labrador at the time that are worth bringing back. The model Joffe used to assess Newfoundland and Labrador “may understate [the provincial government’s] default probabilities for two reasons. First, the projection of future non-resource revenues as a constant percentage of GDP based on 2011 proportions misses the reduction in federal assistance attendant to the expiration of the Atlantic Accord. Second, oil revenue projections assume that exploitation can continue through the forecast period, thus neglecting the possibility that the province’s resources will be exhausted.”

The first point was about the loss of federal Equalization transfers and more importantly, the extra federal transfers contained in the Atlantic Accord 1985 and what at the time Joffe wrote was the other extra payments deal Danny Williams got in 2005.  Since Joffe wrote his paper, the federal government has transferred more money to Newfoundland and Labrador.  One was in 2019 review of the Williams side deal.  The other was other money related to the federal interest in Hibernia.  Altogether, they will add $576 million to the provincial government’s income in 2023 according to the budget forecast. 

The 2019 money stands out in hindsight for the way the official news release claimed it would improve the provincial government’s net debt and lower interest costs.  Because Muskrat falls was a big issue at the time and the agreement contained a promise on rate mitigation, the cash and rate mitigation appeared to be connected somehow.

But looking at the release again almost four years later, this sentence stands out:  “Cash installments starting this year until 2056 have no restrictions on the use of the funds and are ‘front end loaded,’ with approximately $1.9 billion, or 60 per cent, being received by 2030.”

The news release about the second deal tied the extra federal money to rate mitigation. But that looks a bit suspicious when you look at the actual agreement. There’s no mention of how the Hibernia money would help finance the rate mitigation deal. Even in the so-called technical briefing to reporters, the agreement-in-principle and the Hibernia-related deal are treated separately but without any explanation of how the Hibernia money would lower electricity rates.

At best, we’ve got a big question about the Hibernia cash deals that demands an answer. At worst, we’ve got a couple of deals either side of a major financial crisis by the federal government to prop up a financially shaky province but not disclosed as such. There are knock-on consequences if this is a secret bailout and not rate mitigation.  Everyone thinks rate mitigation is a done deal. It isn’t, as readers know, but others have been misled, which will lead to other political problems.  

Then there are the knock-ons if this is a bailout some can see – like lenders – as proof the provincial government’s debt is backstopped by the federal government, no matter what. On the surface those consequences might look good but they come with their own potential problems. They would make Newfoundland and Labrador even more vulnerable financially and politically, for one and not more secure as the politicians have been promising.

Plus, it appears the government is just using the money to cover its own spending.  The money’s not being used to keep electricity rates from rising.  So, there’s that, too.

In the Health Accord – another important government strategy – co-chairs Sister Elizabeth Davis and Pat Parfrey explained that Newfoundland and Labrador routinely spent more per person on health care than any provincial government in Canada but produced the worst health outcomes.  The big selling point of last week’s budget was a record level of health spending.

There’s another pushme-pullyou from the Furey Liberals. Policy confusion. Saying two contradictory things. The talk about net debt.  Spending more on health care. The Future Fund that isn’t really an investment fund using oil money. Or the surplus that’s actually a deficit.

“Our deficit has turned to surplus for 2022-23 with an achievement of return to balance earlier than forecast,”  someone wrote for Siobhan Coady to say.

As it turns out, there was some windfall cash in the budget this year, courtesy of the federal government. The money actually belongs to other years.  It’s income tax, corporate tax, or sales tax collected by the federal government and passed along to the provinces who have tax collection agreements with Uncle Ottawa.

What the provinces found out in that when the governments were putting together their 2021 budgets, the federal government underestimated how much money it would collect for all of them.  Towards the end of 2022, the feds finally got the numbers sorted out largely since the tax collection doesn’t really end until well into the next year.  It takes a while to sort through all the returns.  

Everyone got extra cash.  Only Nova Scotia was honest about it. New Brunswick buried its windfall. Newfoundland and Labrador tried to hide it as well but the folks at AllNL (allNewfoundlandLabrador.com) asked officials. Took a couple of goes but eventually the officials muttered something about $600 million extra.  It looks like about $650 million to $700 million extra. They buried it in an abnormally large corporate income tax amount that was $700 million higher than 2021 and $650 million more than projected for 2023.

That secret cash, reluctantly disclosed by government officials only when asked more than once about it, shreds that claim about producing a surplus ahead of schedule. For starters, the Liberals abandoned their 2016 commitment to balance the budget.  They abandoned it in 2017 and just kept pretending until COVIOD came along.

But with this new tidbit about windfall cash, we know that on a cash basis, the tiny surplus of $366 million actually becomes a deficit of at least $285 million.  And if you use the accrual accounting of the budget speech, $650 of the $786 million surplus was actually money from 2021 or earlier. The surplus would be at most about $170 million.  Nothing to get excited about.

Oh, and if you forgot, this is yet another example of the finance department not reporting something that materially affects the public record about the provincial government’s financial health.

Just one of the patterns that’s been repeating for 20 years.

Look for more in the Series:

Key Indicators of Financial Health

More Economic Policy Confusion

More Health Spending. Less Health Care.