What lies beneath
The financial mess no one cares about
“Current fiscal policy is unsustainable over the long term - albeit to a modest extent - for the subnational government sector as a whole [in Canada], which includes provincial-territorial, local, and Indigenous governments.”
This is the opinion of the Parliamentary Budget Office in Ottawa, delivered last July with all the jargon and national level perspective the PBO could muster.
You have to look more closely to find Newfoundland and Labrador.
Second lowest provincial revenue (as a share of the economy), except for Alberta, from now to the end of the century.
Steady growth in spending as a share of the economy, especially health care, again to the end of the century.
One of two provinces to see growing gaps - deficits - between money in and the money that goes out.
The result is that within about 25 years - the snap of anyone’s fingers in government time - the net public debt in this province will be 118% the size of the economy. Right now it’s roughly 35%.
Let’s add a couple of things to help make that picture clearer for everyone.
First, that net debt measure the PBO and others use is actually smaller than what we are liable for. Total current liabilities - borrowing, unfunded pension liability, and the like - was $26 billion at the end of March 2021. A year old but that’s the best number we have. The economy produced about $30 billion in goods and services that year.
So, not 35% as a share of GDP.
Liabilities more like 86%.
We service those liabilities - we pay the interest only every year - based on the total, not the imaginary net debt number.
Second, for people who think that the total debt is no big deal, remember that what we pay to cover the interest - around $672 million in the current budget - is the third largest expense government has.
Health is way out in front.
Then there’s K-12 schools.
Then there’s debt servicing.
Some people are still blowing raspberries at dropping $672 million with total spending at $8.5ish billion.
Well, what we pay in interest is:
more than four times what we give to support towns and cities in the province for everything from garbage collection to clearing roads, public libraries and all the rest of the stuff in municipal affairs.
about three times more than we spend to help people with low incomes and no incomes.
more than one and a half times what we give to Memorial and CNA.
a little less than one and a half times what we spend on highways, water bombers, air ambulance, public buildings, and managing government procurement.
It’s a lot of money.
Think of it this way:
Budgets are about what we collectively value. What we think is important.
So health care is our biggest expense. Extremely important.
Education for children. Also very important.
Poor people, forest fires, libraries, post secondary education, safe roads, economic development, protecting the environment, jails and judges, fire fighting, wildlife, and literally everything else in every other department, none are as important, not even close to being as important as giving money to banks and people on the mainland who lend the government money and buy government bonds.
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You likely didn’t pay attention to any of that last spring when the budget came down.
Most people don’t.
The politicians in the House of Assembly likely never looked at the budget that way.
They get paid to.
Yet every year they let the debt grow and they let us keep paying interest on that debt as one of the top three most important things in the province.
That isn’t going to change any time soon and it may well get worse. Three reasons for that.
First, the budget this year calls for about $3.0 billion in new borrowing. Some of that is old debt we are not paying off but just refinancing. We seldom pay off debt. We just refinance it. This year and over the next few years we will be refinancing at lower interest rates in many cases. Hold that thought for a second. Just remember that the old debt never goes away.
The rest of this year’s borrowing - roughly $1.3 billion from the Estimates - is new debt. Money we have to borrow just to pay the bills this year. We don’t just refinance the old stuff. We add to the pile.
So even if we finance old debt at lower interest rates and therefore don’t pay as much interest, adding *more* debt without getting rid of the old debt just means we keep paying more on interest than we do spend on almost everything except health and education.
What’s worse, borrowing remains one of the top three sources of cash for the government right after personal income tax and sales tax. This year, we will borrow about as much as we take in from either of those taxes.
Second, inflation. Rising oil prices are driving up the cost of everything not just for you and me but for the provincial government as well. we keep spending more than we take in anyway. Inflation means the cost of just staying where we are today will be more expensive next year. And since we are not bringing in new money to match the rise in costs, we either have to cut something or - more likely - we will just borrow more.
Third, it will cost us more to borrow, period and it will cost us more to borrow more. That’s because the Bank of Canada has been hiking interest rates to slow the economy and lower inflation.
There was a story on VOCM the end of May. They asked finance minister Siobhan Coady about higher interest rates. That would have “a tremendous impact on our overall budget,” she said. No kidding.
But in May the rates hadn’t gone up. By the time Coady spoke to CBC in mid - July, “would have” was now changed to “is having.” Not only did we have to borrow a huge amount, but because the government waited to borrow the money, they weren’t able to refinance old and borrow new money for over-spending at lower rates.
There’s another hit that most people don’t know about. The provincial government borrows a lot of money for short periods like 30-, 60- or 90 days. They need that cash to cover their expenses every two weeks when the cash from things like oil or sales tax and so on don’t come in when money has to go out.
They are called treasury bills or t-bills (pronounced tee bills) for short. Interest rates on those went up as well. That’s another added expense.
The CBC story linked above said the government had about $1.7 billion in that short-term debt. There was no indication how much more they would need to borrow through to the end of the year and there are some hints the tee bill borrowing to date is significantly higher than the amount CBC had. I’ve got a couple of requests to the finance department for an up-to-date list but as this goes to bed over a week later, there’s been no response from the department. I’ll let you know when the number comes in.
You can add the risk of a recession to those higher interest rates and inflation to the mix of things that make the immediate future look a lot less bright than many people think. Every government in Canada faces the same risks but in Newfoundland and Labrador we are in a much more precarious spot. Because no one - unions, the general public, and politicians regardless of stripe - is interested in changing the government’s strategic course, we are going to be chronically at risk of the situation that happened in 2015 and again in 2020. It could happen if government revenues drop, like in a recession. And it could happen if inflation continues.
In 2015 the Liberals said they wanted to lessen dependence on oil. What they really needed to do was lessen dependence on borrowing by changing what government does and how it does it. They needed to maintain key services and find ways to either stop providing some services (and maybe let others pick up the slack) or provide services more efficiently and effectively.
The Liberals didn’t do either, just like the Pea Seas didn’t, and both of them with wide public support.
One of the results was that in 2015 and again in 2020, the markets weren’t interested in lending the province money at the rates the province was willing to pay. No long term debt or short term debt, which the government needs to run. In early 2020, at the start of COVID - purely by coincidence - the government couldn’t find any short-term cash. That led to the fear it wouldn’t make payroll. Dwight Ball even wrote a panicked letter to the Prime Minister which finance minister Tom Osborne had to disown the next week.
When you are in the financial state Newfoundland and Labrador is in, the markets are not really keen on your debt anyway. When things tighten up, they are less keen but there’s usually enough to get by. Sometimes - which used to be very rarely - they are not keen at all. Those not keen at all times have happened more in the past decade than in the previous 50 years and they will keep happening as long as the government stays on the same course we have been on since the early 2000s.
Once was a shock. A warning. Twice in five years should have made people find their fiscal Jesus.
But it didn’t.
*That* is the ongoing problem that lurks under everything.
Oil will save us, some think.
The only people who think that way are folks who always thought oil was the answer to everything. They had one thought. One obsession. They cannot see anything else. They are also folks who depend on things staying like they are.
We are not talking a handful of rich people. We are talking lots of ordinary folks. These are the people who watch the price of oil. They cheer when it is up. They fret when it goes down. They are the same as the people who badgered government to borrow money to cut gas tax just so they could fill up their giant trucks that cost more than the average family in the province takes in before taxes.
There’s another bunch. They don’t want to cut government spending either. They don’t obsess about oil. They obsess about “green” energy. And just like the oilies, the greenies want to spend as much public money as possible - as much news debt as possible - to feed *their* obsession.
Borrowing. Borrowing. And more borrowing, regardless of the growing risk.
In case you missed it, by the way, that’s how the government “cut” gas tax. They borrowed more money. Literally. They didn’t cut anything.
We are borrowing $3.0 billion this year in long term debt. We are constantly looking for up to that much in short-term debt. And the government borrowed *more* just to give a few people a break on their gas taxes by an amount no one noticed the next time they filled up their truck.
That’s just ordinary nutty for people around here.
There is bigger nuttiness afoot.
Like energy policy.
The very same people who borrowed to cut gas taxes are also the people who - at the very same time - want to double oil production by 2030 AND get rid of oil and replace it all with green energy of one kind or another. And they are willing to subsidize both with more borrowing that you will be on the hook to pay for.
They are already on the hook for at least a billion dollars to get Bay du Nord going. They are also blowing along with wind projects and promising cash of one kind or another and hiking electricity rates to pay for some of it.
Don’t think they won’t. Muskrat Falls is all about forcing people in Newfoundland and Labrador to pay for stuff they don’t need so other people benefit. We pay for the electricity even though we actually don’t need it or could get it cheaper somewhere else. Nova Scotians get it for free or at a huge discount.
Well, these wind farm and hydrogen projects are basically the same scam. No surprise all the talk is of building them in the most economically depressed parts of the country, where people are the most desperate for jobs. And in Newfoundland and Labrador we seem to have more talk simply because the government has a reputation for throwing cash at anything to keep it going. Muskrat Falls. Come by Chance. Oil companies during COVID.
No surprise at all that the provincial government is already telling wind farm developers they can get the ratepayers to cover some of the costs of their power lines through local electricity rates even though local consumers don’t need any of the lines associated with wind farms built solely for export or other industrial use.
Energy isn’t the only place of the pushme-pullyou nuttiness. We have a health accord with which no one seems to agree. Even its final report was not actually the last report issued but the second of four. The Accord was supposed to lower health spending and make people healthier. What it delivered is about spending more money, changing things that are only indirectly related to health, and doing nothing to lower health care costs today.
It’s like talking about policy based on evidence. Like the tax on drinks with extra sugar in. Not a grab of cash. Not a desperate brain fart. But health policy. And yet not from the health ministry, which is responsible for health policy but the finance department, which is in charge of finding cash wherever it can.
Based on evidence, too. Yet, all the evidence shows taxing sugary drinks doesn’t do anything to improve health. If it lowers sugary drink sales at all - and that’s a big “if” - people find their sugar in other places, like through increased candy sales. It simply doesn’t work. *That* is what the evidence says plainly.
Supposedly the mark of genius is the ability to hold two opposing ideas in your head at the same time and believe neither.
In Newfoundland and Labrador, working in government requires you to hold two contradictory notions in your head at the same and argue passionately for both equally, simultaneously.
No one knows what to call that.