Vous êtes sur la page 1sur 55

A Decade of Squandered

Opportunity
The Budget Colloquy

Published on the Uncle Gnarley Blog


Summer 2015

At the close of the War found Newfoundland in the enjoyment of a greater measure of prosperity than she
had previously experienced. The price of codfish had risen during the War to heights hitherto undreamed
of, and fishermen and merchants alike were able to congratulate themselves on the making of large
profits. A great improvement had taken place in the standard of living; for the first time in their lives the
fishermen had more money than they required for immediate necessities and standards were set up which
in later years could not be maintained. It was forgotten that the conditions brought about by the War were
transitory and exceptional; men grew accustomed to thinking in large figures and schemes and projects
which a few years earlier would have seemed visionary and fantastic were regarded as the natural product
of the new era. Government and people alike were the victims of an over-confidence, which, in the years
following the War, was to blind them to realities, to induce a fatal disregard of the elementary canons of
public finance and finally to involve them ever more deeply in financial embarrassment. Within 12 years
the public debt was more than doubled. As a result of a long succession of unbalanced budgets, which in
turn necessitated continuous borrowing, the financial position of the country was clearly unsound even in
the seemingly prosperous years of 1929 and 1930; when the economic depression set in and the price of
fish started to fall, the Island was faced with bankruptcy.
An Excerpt from the 1933 Amulree Report

Preface
As a regular follower of provincial politics1 and current affairs, I was generally aware that
spending by the provincial government had increased, since 2006, to levels well outpacing
inflation. Yet it was not until the release of the 2015 Budget, and the provinces 5 Year Plan 2
for fiscal recovery, that I awakened to true state of the provinces finances. The $1.3 billion
projected deficit in that year was enough to garner attention.
However, it was the governments prediction of a nearly $2 billion increase in revenue, during
the period 2015-2020, as the main driver for a return to balanced budgets, that seemed unlikely
enough to be incredulous.
I remember reading the assumption for revenue growth and realized, immediately, that it was
just too optimistic. Considering the prevailing pessimistic outlook for oil prices (even in early
2015), combined with lower economic activity, higher unemployment due to the completion of
our resource based megaprojects, and the lower royalties from Hebron, too, my reaction was
thinking that the prediction amounted to nothing less than reckless fiction. In the absence of a
miracle, I concluded, it would be virtually impossible for the province to return to a balanced
budget by 2020.
Within the 2015 Budget Highlights document, the government stated there would be nearly $5
billion of new borrowing; the amount necessary to bridge the revenue shortfall to 2020. Based
upon my own more reasonable assumption of new revenue growth, and the near certainty that
the budgeted sum for Muskrat Falls equity would increase I also concluded, in April 2015, that
by the end of the decade new borrowing in the $8-10 billion range would be necessary.
The full extent of the Provinces structural deficit had become obvious. Without decisive change,
the Province would commence a period of borrowing to a level unmatched in our history.
The Budget Highlights glossy brochure was clearly written by a government preparing for an
election. Exaggeration, even hyperbole, while unwarranted at any time, is often found to underlie
those democratic expositions. But, it should be said the P.C. Governments slogan Balancing
Choices for a Promising Future was derived from neither balance nor promise. In fact, it can best
be characterized as delusional.
Having come to that conclusion, I began studying the budget documents delivered over the past
20 years. My initial goal was simply to understand how we had regressed from the position of

I have been a regular reader of the Sir Robert Bond Papers Blog since 2007. Although our opinions sometimes
differ (rarely) we have to duly recognize the contribution he has made in identifying the issues in real time.
Particularly on the budget, Ed has been right since 2006.
2
http://www.budget.gov.nl.ca/budget2015/highlights/highlights_2015.pdf
3

having a balanced budget in 1996, to the current Updated one recording a deficit of nearly $2
billion; in essence, a financial debacle.
Amulree had asked a similar questions in 1929, and I wondered, too, in the current context: how
Newfoundland and Labrador, even in a period of relative economic prosperity, could have
acquired such a staggering borrowing requirement?
The research undertaken in April and May, 2015 evolved into a series of posts, published on the
Uncle Gnarley blog, entitled A Budget Colloquy. I do not suggest it is complete; however, I
think it is a worthwhile endeavor; possibly, one that serves as a tutorial in the experience of
downside risk found in the unwarranted assumption.
There were some startling statistics that resulted from this work. I want to cite just a few:

In the period of 2006 to 2010 annual inflation adjusted spending increased from $5 billion
to $6.8 billion. The 35% increase in real spending, in 4 budget cycles, is the underlying
cause of our current budget deficits.
In inflation adjusted dollars, the amount spent by the government on salaries has
increased from $1.7 billion in 1997 to $3.8 billion in 2013. In real dollars (after inflation)
the government spends twice as much on salaries now than they did in 1996.
In 2013 nearly 50% of government expenditures was associated with salaries.
In the period of 2007 to 2014 (oil boom) capital works spending was $2.3 billion above
the historical norm of $300 million per year.
In the period of 2007 to 2014 (oil boom) an amount of $8.5 billion above the historical
norm was spent on salaries.
During the oil boom for every new $1 in infrastructure spending there was $3 new dollars
spent on the public service.
Reductions in income tax and HST were clearly premature.
In the period 2015-2016 the provinces combined annual income from federal sources
and offshore royalties will be less than the federal sources, alone, in 1997, in real dollars.
We are in purgatory when it comes to federal transfer payments.

Against the backdrop of the recent fiscal Update released by the newly elected Ball government,
I thought it would be beneficial to consolidate these posts, as they appeared, in a single
reference. The Colloquy contains plenty of historical data, analysis, and ideas for financial reform.
I believe it is important that the public fully understands how we got here and some of the
decisions required to reverse this sad and unfortunate circumstance. Indeed, as I see it, the fiscal
situation is dire enough that Newfoundland and Labrador may be entering Stage 2-3 of a debt
spiral3.
The general population seems to be awakening to this fiscal crisis, although it is less than clear
that the new government understands the depth of the trouble the province is in, or if it is willing
to act in a timely manner.

My greatest hope, quite simply, is that readers will conclude, as I have, that this debt and
spending crisis is real.
That realization, alone, might inspire this truly vulnerable society to step back from what the
financial precipice on which we are resting.
Hopefully, readers will profit from the opportunity to better understand the origins of the crisis,
as I have, and assess the measures proposed in the eight Posts of the Budget Colloquy. Such a
difficult issue will naturally attract different views and as many solutions. That is perfectly natural.
(The full Budget Colloquy will be published on the Uncle Gnarley Blog, next week, under the title
A Decade of Squandered Opportunity.)
But there is one thing on which we must find unanimity, and quickly: that is the need to act. We
must individually and collectively accept that cutbacks and belt tightening will be both
unavoidable and painful. In addition, we must be prepared to tell the new Government of Dwight
Ball we expect his Ministry to act courageously, expeditiously, and wisely.
Ever the optimist, I hope that in acknowledging the crisis and dealing with it, we will recognize its
origins in failed leadership. By acting firmly and decisively, I also hope there will emerge from this
sad and unnecessary experience, a stronger, wiser, more enduring Newfoundland and Labrador
society.
______________________________________________________________
Stages in Debt Spiral3
1) Debt Levels increase. (This could be due to overspending, inefficient tax collection, bank
bailouts or economic slowdown)
2) Markets become concerned about debt levels leading to higher bond yields (higher rate
of interest)
3) Higher cost of servicing debt. Rising debt increases debt interest payments. But, also
Governments have to pay higher interest payments on debt because of rising bond yields.
This increases government spending even more.
4) To reduce bond yields, governments need to cut spending and increase tax.
5) Trying to reduce debt can cause a recession. The Impact of spending cuts leads to lower
aggregate demand more unemployment and lower economic growth. Lower economic
growth leads to lower tax revenues.
6) The shrinking economy means it is harder to meet debt repayments. Confidence falls.
Bond yields remain high despite the spending cuts.
7) With a shrinking tax payments, the government struggles to meet interest payments. Also
markets no longer want to buy more government debt, leading to partial or total default.

1 ITS THE SPENDING STUPID


As Posted on Uncle Gnarley on May 11, 2015

My political opinions were largely formed in the 1990s. These were turbulent economic times for both
Newfoundland, and the country as a whole. In Newfoundland the closure of the fishery represented
economic death by a thousand cuts. Our population declined by 10% and an entire generation of
Newfoundlanders were forced to migrate. In Canada, debt and growing deficits had us on the verge of
default. We were the economic basket case of the G73.
It was bleak times for both Canada and Newfoundland; yet we persevered. The Liberals came to power
in 1993 and implemented a major program of spending cuts, intended to reduce government spending
and balance the budget. In this province, Clyde Wells had to manage a pseudo economy; yet he was still
able to control spending and balance the budget in 1996. This was before the Hibernia platform was
completed, and prior to White Rose or Hebron. In the backdrop of our current $2 billion dollar deficit,
this can be considered nothing less than remarkable.
In Canada, the ratio of spending cuts to tax hikes was seven-to-one in combating the deficit. Asked why,
the Prime Minister Jean Chretien replied: "There was more need on one side than the other". These cuts
were across the board, and deep. They affected every aspect of society.
The cuts in the 1990s were difficult for everyone. Still there was an underlying agreement in the country,
even amongst the critics, that these cuts were a necessary evil. During my five years in university my
tuition increased from $1420 a year to about $3350. To put that into perspective, it would be about $5000
in todays dollars, compared to the $2550 that Memorial students presently enjoy4.
There were a few ideologues who were immune to reality. I remember current Liberal Cabinet Minister,
Dale Kirby, as president of the Canadian Federation of Students, organizing student rallys at Confederation
Building to protest the cuts to education. I did not join those rallies because I believed in the cause of
balanced budgets. I knew my future depended on those tough decisions made by Chretien, Martin and
Wells in the 1990s. Everyone had a stake in the required correction to government spending levels. Killing
the deficit, and restoring Canadas economic security was a matter of both necessity and of pride.
Fortunately, my own view was shared by enough Canadians that these tough actions were implemented.
Our collective sacrifices were rewarded with 15 years of economic growth and relative stability, to a point
where we are now envied by our G7 peers.
Society of all classes, races, and creeds are better off today because of the drastic actions taken in the
1990s.
Looking to the present, it is must be obvious to any objective pundit that Newfoundland and Labrador is
again at a crossroads. Tough political decisions need to be made and implemented. The collapse in the
oil price is the catalyst for such a review, but not the sole reason for it.

3
4

http://uk.reuters.com/article/2011/11/21/us-crisis-idUSTRE7AK0EP20111121
http://www.mun.ca/undergrad/apply/fees.php

The recent report5 of $1.8 billion dollar deficit should be evidence enough for a call to action. It is clear
to most that the province has a structural financial problem. We are spending well beyond our means.
Yet, compared to the economy of 1996, things are still relatively buoyant. How could we balance a budget
in 1996, but cannot do it today?
This is a valid question, which requires us to review what has changed. Figure 1.1 provides a summary of
both the Total Revenue and the Current Account Spending as contained within the Estimates for the
past 20 years. For clarity the current account spending does not include capital spending on items such
as hospitals, buildings, roads and Muskrat Falls. It is purely the annual cost of running the government.
Inflation, adjusted data for the past 20 years, has been included to provide a fair historical comparison.

Figure 1.1: Current Account Spending and Revenue Inflation Adjusted (2015 Dollars)

The inflation adjusted numbers demonstrate how relatively stable the revenue and expenditures of the
provincial government were from the period of 1995 to 2005. During this time current account spending
averaged around $5 billion (in 2015 dollars).
However, in the period from 2006 to 2010, the annual inflation adjusted spending increased from $5
billion to $6.8 billion annually, representing an increase of about 35% in 4 budget cycles. Despite recent
austerity budgets, real spending has held steady since 2010, with a surprising increase forecasted in the
current 2015 election budget.

http://www.cbc.ca/news/canada/newfoundland-labrador/deficit-projection-1.3345756

Due to our dependence upon natural resources our revenue has been much more variable. Although the
numbers from the estimates represent a modified cash accounting basis, and not accrual consolidated
accounting, the trends are obvious. Fueled by overlapping oil royalties and Atlantic Accord payments, in
2007-2011, the revenues to the province were nothing short of spectacular.
However, these spectacular revenues were both short lived and variable. But the reduction in revenue,
starting in 2013, was also very predictable.
It is important to note that the dramatic reduction in revenue in the period from 2011 to 2015 is not
purely the result of the collapse in the oil price. Part of the revenue reduction is due to long known
reduction in oil production, and the phase out of the Federal Atlantic Accord payments. Which brings us
to the current dilemma the province faces.
Costs are relatively easy to forecast when compared to revenue predominantly pegged to commodity
pricing. We know that current provincial government expenditures are at unsustainable levels in the long
term. This is an absolute conclusion that can be reached by any reasoned individual. Cuts are required.
More challenging, however, is forecasting a stable long term revenue stream to enable long term
planning, and to understand the magnitude of the required long term spending cuts. This is very a tricky
business, and governments would be wise to take a conservative view in the long term planning of
revenue projections.
Within the budget highlights document, produced in 20156, the government provided a forecast target
for Gross Revenue going into the future. This Gross Revenue is a slightly different metric than shown in
Figure 1.1, but it does demonstrate a forecasted increase in revenue of about $1.6 billion from the period
2016 to 2020.

Table 1.1: Consolidated Surplus (Deficit) in Millions $

This additional $1.6 billion in new revenue, over the next 5 years, is the reason the PC Government did
not plan to implement major cuts during the 2015 budget process. Instead, this new revenue will allow
spending to be held at nearly a constant level in real dollars.
It must be asked: where is this additional revenue coming from if oil prices remain in the expect $70 dollar
per barrel range? It is worth investigating the potential sources of new revenue.

http://www.budget.gov.nl.ca/budget2015/highlights/highlights_2015.pdf

New Revenue Source #1: Oil Royalties


Royalties (Mining and Oil) contributed $1.8 billion in royalties in 2014, with a forecasted contribution of
$1.3 billion in 2015. Looking into the future, Hebron will be producing oil in 2018 but due to the spiraling
project costs and lower price of oil, payout will be delayed by several years. The royalty, prior to payout,
is a modest 1%. The province will therefore only net $200-300 million annually from Hebron for the
remainder of the decade. This must offset the declining production from the existing fields.
From the 2008 Hebron review Wade Lock predicted that total combined royalties in the province would
be $1.7 billion in the period of 2016-2020. This was with a higher price of oil, and lower development
cost. I do not anticipate royalties in the 2016-2020 range being more than $300 million more a year than
the $1.3 billion collected in 2014. Oil royalties will only be a small portion of the $1.6 billion anticipated
increase in revenue unless there is a rapid and unexpected rebound in the oil price.

New Revenue Source #2: New Taxes


The increases in the tax regimes included in the 2015 budget are necessary. But they will not generate
additional revenue to the province. The slow-down in the province, and in Albertas (with the lower
remittance payments to NL) will have an impact on the sales and income taxes collected. The change in
HST and personal tax rates will only be enough to offset the natural decrease due to the weakening
economy. The new tax increases will not generate new revenue; they will only serve to stabilize the
existing revenue levels.
Considering the precarious position we are in I agree with the PC position on the HST, and income tax
changes. History has shown that the tax reductions implemented by the Williams government in the
period of 2006-2010 was not good long term economic policy.

New Revenue Source #3: Nalcor


Within the 2015 Budget Highlights document the province provided commentary concerning the future
revenues which Nalcor will provide to the provincial government.

Just so my position is clear, this graph insults the intelligence of every Newfoundlander and Labradorian.
It suggests that the equity will be paid back by 2025, with the revenue stream after that being a return on
investment. This is a convenient graph which fails to recognize that the province is borrowing the $3.1
billion to provide equity for Nalcor. There is nearly another $1 billion dollars of deferred dividends the
province has bypassed to fund Muskrat Falls and the other oil projects.
The taxpayer has provided $4 billion to Nalcor over a 10 year period. In addition, the province will be
paying nearly $200 million a year in additional interest payments to allow this false equity to be borrowed
from a different bank. By 2025, the province will have spent another $1 billion in interest payments to
fund this project. It is the unaccounted interest during construction.
To suggest the province will be paid back by 2025 is clear misrepresentation on the part of government.
It is time to stop pretending that Muskrat Falls or Nalcor will generate significant amounts of new wealth
to Newfoundland and Labrador. The jig is up. It will be late 2019 before they get full production from
the plant. Even then, at market value this will contribute about $100 million a year in true revenue.
Anything else reported by Nalcor will come from the taxpayers of Newfoundland and Labrador in the form

of a tax on electricity. This will have to be used to pay off the $5 billion dollar direct debt, and the $4
billion dollar equity investment the province will have made to fund this project.
Nalcor will not be a significant generator of revenue for the province, until well into the future, when the
Upper Churchill agreement expires. It is time for Nalcor to be transparent on any claim suggesting
otherwise.
Uncertain Revenue
I cant see any valid basis for this rather optimistic forecast of future revenues to the provincial
government. Dwight Ball, Cathy Bennett and the remainder of the opposition would be wise to question
government on the source of these forecasts. They should dissect and challenge the numbers.
They do not make sense, and in my opinion are overstated by about $500 million to 1 billion a year with
a realistic assumption of oil being in the 70-80 $barrel range, for the remainder of the decade.
A realistic but conservative view on revenue projects will highlight the extent of our spending problem.
If I am shown to be correct, our $5 billion in new borrowing could easily be $7 to $8 billion by 2020.
Combined with Muskrat Falls the people of the province will have a public debt in the $20 billion range.
This is $40,000 dollars of debt for every person in the province.
The time is now to act.
As Chretien said in 1994, the problem is not taxes, the problem is spending. Few people, 20 years later,
would argue with his actions. Likewise, few people can argue that we do not need significant cuts in
public spending in the Newfoundland and Labrador of 2015.
In my opinion, we need to cut at least 15% from our annual budget in real dollars to be sustainable on a
long term basis. These cuts will not be easy, but they are required.
The economic house of cards that was built by the Williams government is about to fall. It is time for real
leadership to deal with the structural issues we have in government financing. To modify a great 90s
political slogan Its the Spending Stupid

2 PUT HIM IN THE LONG BOAT TILL HES SOBER


As Posted on Uncle Gnarley on June 1, 2015

The 2015 budget documents contained a piece entitled Budget Highlights Balancing Choices for a
Promising Future7. This is a glossy flyer which provides a summary of the current fiscal position of the
province, and a look 6 years into the future. It predicts that in 5 years the province will return to balanced
budgets. It contains sufficient colored graphs, and statistics to seem believable.
I encourage all Newfoundlanders and Labradorians to read this document.
In a recent Uncle Gnarley post, entitled Its the Spending Stupid, I gave some initial thoughts regarding
the 2015 Budget. Since then, I have been practically consumed with trying to better understand the
province's fiscal position; both current and projected. The work has included a financial review of the past
twenty years. I hope it will result in additional perspective as I dissect the data.
At the outset, I can say my conclusions are certainly similar. I would add, we cant delay further the massive
changes that are required to correct the structural issues that affect the provinces finances.
People should not be influenced by the glossy brochures produced by the Department of Finance. Nor
should they suffer the unsubstantiated optimism that an inevitable rebound in oil prices will take care of all
our problems; a view held by the Government's advisor, Wade Locke8.
Uncle Gnarley has been gracious enough to provide me the space for a three part series to present some
of the data from the past 20 years of budget documents (both the estimates, and the public
accounts). Furthermore, I will offer my opinions on the provinces present fiscal situation, a recommended
plan to control spending, and suggestions to restore a reasonable balance to spending.
This first Part will review the government spending over past years, with a view to educate the reader as to
where the oil money has been allocated. Embedded within It's the Spending Stupid" is a graph containing
the inflation adjusted spending for the past 20 years by the government. The data was taken from the
Estimates and adjusted for inflation in accordance with the Bank of Canada's online calculator.
The data demonstrated that, in the period from 2006 to 2010, the annual inflation-adjusted
spending increased 35% in four budget cycles. Despite recent austerity budgets, real spending has held
steady since 2010, though a surprising increase is forecast in the current 2015 election budget.
This is an alarming increase in public spending.
Even more alarming is the fact that, based upon the 2015 Budget Highlights document, we are about to
embark on a borrowing program of nearly $5 billion (new debt) over the next 5 years. Moreover, this new
borrowing is not required solely for capital works projects, infrastructure, or Nalcor investments.

7
8

http://www.budget.gov.nl.ca/budget2015/highlights/highlights_2015.pdf
http://www.mun.ca/care/Locke_Presentation_Mills.pdf

Figure 2.1: Forecast Borrowing next 5 Years (Source 2015 Budget Highlights)
Of the $2 billion being borrowed in 2015, nearly 350 million is required for the day to day running of
government. It is very reasonable to ask that despite the collapse in oil prices: how can we be in an
operating deficit position, even with a relatively strong economy powered with 3 simultaneous Mega
Projects (Hebron, Vale, and Muskrat Falls? Either one of these projects would have been an economic
messiah in the pre-oil economy of Newfoundland and Labrador.
The answer lies in the spending trends over the past 7 years when compared to the historical norms. The
author has drawn on 20 years of data from the public accounts9 to try to determine the trends in spending.
The data is from the annual report of Program Expenditures and Revenues contained on the department
of Finance website. Unlike the estimates this data is based on the accrual accounting methods, and
presents the expenses in the year they were accrued.
Figure 2.2 presents a revised Gross Revenue and Gross Expenditures made by the province from 1997 to
2013, with a forecast to 2020. The actual data comes from the Consolidated Statement of Operations
within the annual public account documents. The forecasted data comes from the 2015 Budget Highlights
document. This data is in real 2015 dollars. The historical data has been adjusted for inflation as
determined by the Bank of Canada inflation calculator, the future data has been discounted by a 2%
annual inflation rate.

http://www.fin.gov.nl.ca/fin/public_accounts/index.html

Figure 2.2: Inflation Adjusted Revenue Versus Expenses (Consolidated)


On a real dollar basis, expenses were relatively consistent in the $6 billion dollar range from the period
from 1997 to 2006. From 2006 to 2010 the annual expenses increased to $8 billion, where it has remained
relatively constant in real terms. Despite a small uptick in 2016, spending will slightly decrease by 2020.
The provinces spending profile dramatically changed in the period of 2006 to 2010.
Where did this money go?
Figure 2.3 provides a summary of expenses by object, as documented within Schedule 12 of the public
accounts. Again this data has been adjusted for inflation. The reader must be reminded that this is the
consolidated expenses, and not from the estimates. As such the capital works spending is not
recognized in the year the money is actually paid out to the parties doing the work. Rather the
depreciation, only is recognized in the amortization line item within the annual expenses.
To explain this concept in practical terms, the $20 million spent on Humber Valley Paving in 2013 would
be amortized over 20 years. In the estimates the full $20 million would be recorded in the expenses for
2013 on a cash basis. However in the consolidated account only $1 million in depreciation is expensed
($20 million depreciated over 20 years is $1 million per year in a linear depreciation model). Although
$20 million was spent in 2013, only $1 million of that expense was included in the net debt, or deficit
calculations.

Figure 2.3: Expenses by Object 1997-2013

Salaries and Employee Benefits


It is no surprise to anyone who lives in St. Johns that there has been a rapid expansion of the public service
in this province. There is now literally a government office in almost every strip mall in the city. After
reviewing the estimates it was no surprise that Salaries has increased at rate far outpacing inflation.
Figure 2.4 provides a summary of salary only data from the period 1997 to 2013, again adjusted for
inflation. Also included in this graph is the percentage (%) of salary compared to the total expenses of the
government.

Figure 2.4: Salary and Employee Benefits


In real dollars the amount spent on salaries and employee benefits has increased from $1.7 billion in 1997,
to $3.8 billion in 2013. These are inflation adjusted numbers! In real dollars the provincial government
spend over twice as much on salaries in 2013 as they did in 1997.
This growth should make even the leaders of the provinces unions blush with shame.
However, it is not until you calculate the percentage of government spending when you realize the breath
of the issue. In 1997 salaries and employee benefits represented 30% of the total government expenses.
In 2013 it represented 47% of government expenses. This is a startling statistic.

Professional Services
What was most alarming in reviewing the provinces books was the growth in professional services.
Professional services are outside consultants who supplement the government staff on special projects,
or even day to day works. Every time the government refers to bringing in a consultant the cost of that
work gets allocated to professional services.
Figure 2.5 provides a summary of the amount spent on Professional Services from 1997 to 2013, again
in real inflation adjusted dollars. From the period of 1997 to 2002 about $280 million spent annually for
this purpose. Since the 2003-2004 budget year this amount has steadily increased. The figure now
exceeds $500 million in the 2012-2013 budget year!

Figure 2.5: Professional Services Expenditures from 1997-2013


The taxpayers of this province must ask why, despite the historical increase in the size of the public service,
and given the salaries which we pay public servants, why we have had to effectively double the budget for
external consulting?
I believe that the Opposition should be asking many questions concerning the nearly half billion dollars in
public expenditures in this category. How much of this is tendered competitively? What is the process for
awarding consulting services contracts? How many contracts does this represent? What services are these
consulting doing? How much of this $500 million is essential?
Most importantly, we need to ask how much of the work completed by consultants should actually be
performed by the Public Service? Why is the government doing less, with more?
To give this issue further perspective, the sum is equal to 4% of the 15% HST collected from every NL
taxpayer; almost 1/3rd of all the HST revenues collected is used exclusively to pay for consultants. Figure
2.5 should be met with outrage from the taxpayers of the province.

Capital Works
As explained above, the annual public accounts summarized in Figure 2.3 contains only the depreciation
on the new capital assets. Figure 2.6 provides a summary of the capital spending for the past 20 years,
as contained within the Estimates. This is the amount of cash the government has actually spent each
year on capital works projects. Again, these numbers are adjusted for inflation and the spending on the
resource projects (ie: Nalcor) has been removed to provide a true comparison.

Figure 2.6: Inflation Adjusted Capital Spending (Cash Outlay) Per Year
In the period from 1995 to 2006 the province spent about $313 million annually on capital works projects.
Since 2007 that number has increased, but has now returned to a more historical reference point.
In the period of 2007 to 2014, the government spent a cumulative $2.4 billion on capital works projects in
excess of the historical reference, or $300 million more a year on average.
Due to the method of recognizing the depreciated value as an expense line in the net debt calculations, the
spike in spending from 2007 to 2013 will eventually lead to an increase in the provinces net debt, unless
our annual operational spending can be funded by revenues and not new borrowing. When it comes to
the consolidated accrual accounting, and net debt calculations, the province has only robbed Peter to pay
Paul.

Where Have We Spent the Oil Money?


The provincial government will promote that the oil wealth has been invested in such things as capital
spending. Adopting the methodology of Figure 2.6 to compare the spending of salaries to capital spending
it is clear that the majority of the oil wealth has been spent enlarging the public service, and increases in
employee benefits. This is shown in Figure 2.7.

Figure 2.7: Growth In Salaries Versus Growth in Capital Spending


Since 2005, government has spent $8.5 billion of the new oil wealth in salaries for public servants. It has
spent $2.3 billion on items such as new schools, roads, and infrastructure. The math suggests for
every one new dollar spent on infrastructure, three dollars has been spent on salaries. Capital works
projects can be reduced with the stroke of a pen. Public service salaries are not so easy to cut.
It is important to note that these huge public sector cost increases were enabled by a strong economy,
large and short-term oil royalties, and low interest rates. But the huge increases were truly enabled by
successive governments who were content to spend like sailors on shore leave.
But now, at least two of those three enabling conditions are no longer present. Furthermore, as recently
documented within the Globe and Mail article entitled "Canada's Governments Brace for Looming Debt
Crunch"10, how long will these low interest rates remain?
It raises the question: where will Newfoundland and Labrador be in 15 years, when the cost of borrowing
money is back to historical levels?
By any definition, this is a province that needs to start planning and preparing, now, for 15 years into the
future. The problem is, successive recent budgets, all of which have been characterized by an
unsustainable level of spending, only demonstrate that we are incapable of planning for even 15 months.
Can we start over?

10

http://www.theglobeandmail.com/report-on-business/national-debt/article24397940/

Perhaps. But, first, the political leadership has to change. Decisions are made based on the greatness of
things yet to happen, whether the recovery in the price of oil, revenues from Muskrat Falls, or the
potential of deepwater oil fields. Unbridled optimism is the fuel our recent class of politicians uses to
formulate public policy.
With the 2015 budget the PCs have decided to essentially hold the course on spending. They are banking
on a rebounding economy to grow new revenues with which to balance the budget into the future. If
they are wrong, then get ready for even bigger deficits ahead.
There is only one way to tackle a spending problem. It is time for the sailor to sober up.

3 REVENUE: CLOSE YOUR EYES, MAKE A WISH AND HOPE FOR THE BEST
As Posted on Uncle Gnarley on June 8, 2015

The Government of Newfoundland and Labrador has a spending problem. This problem can be masked
by the temporary windfall revenues which occurred in 2008-2012. However, a responsible government
plans its long term spending based upon a sustainable, realistic revenue stream.
As part of the 2015 budget documents the government attempted to do just that. In the document
entitled Budget Highlights Balancing Choices for a Promising Future11 there was a forecast of both
spending and revenue for the next 5 years. It predicts that in 5 years the province will return to balanced
budgets. It contains sufficient colored graphs, and statistics to seem believable.
The following is a summary as presented by the government in this highlights document.

Table 3.1: Consolidated Surplus / Deficit from the 2015 Budget Highlights
The province is predicting that for the 2014/2015 and 2015/2016 fiscal years revenue will be just less than
$7 billion. However, by 2020/2021 there will be a $2.6 billion (37%) increase in revenue in nominal dollars.
It is this increase in revenue, rather than a decrease in spending, which will provide the means for the
province to return to a balanced budget.
Is the governments projections for future revenue grounded in reality, or is it merely wishful thinking?
This post will attempt to answer this question.
Historical Context on Provincial Revenue
Figure 3.1 presents a revised Gross Revenue and Gross Expenditures made by the province from 1997 to
2013, with a forecast to 2020/2021. The actual data comes from the Consolidated Statement of
Operations within the annual public account documents. The forecasted data comes from the 2015
budget highlights information provided in Table 3.1. This data has been adjusted to real 2015 dollars.
Historical data has been adjusted for inflation as determined by the Bank of Canada inflation calculator,
and the future data has been discounted by a 2% annual inflation rate.

11

http://www.budget.gov.nl.ca/budget2015/highlights/highlights_2015.pdf

Figure 3.1: Inflation Adjusted Revenue Versus Expenses (Consolidated)


Figure 3.2 provides a summary of the sources of revenue to the provincial government. In 2008 the
province received $9.68 billion in revenues (2015 dollars). This was underpinned by $2.5 billion in oil
royalties, $2 billion in Atlantic Accord payments, and $0.5 billion in equalization payments from the
Government of Canada. By 2014 the total annual revenue had reduced to $7 billion. The figure
represents nearly a 30% reduction from the peak. However, it was still nearly $1.7 billion more in annual
revenue (2015 Real Dollars) compared with the amount that sustained governments from 1997 to 2006.
Provincial Revenue by Source
1997-2013
Inflation adjusted
12000

10000
Misc.
Enterprise
Fees/Fines

8000

Investment
Other
Mining
6000

Gas Tax
Corporate Tax
Sales Tax

Income Tax
4000

Offshore Royalties
Federal

2000

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 3.2: Revenue By Source Inflation Adjusted

Figure 3.1 clearly demonstrates that our return to balance budgets will be achieved only by the forecasted
increases in revenue, and not by any real reduction in public spending. The province has decided to tackle
the deficit by holding spending, and raising taxes. This is not a balanced approach.
By any economic measure, Newfoundland is in a recession. Major projects are winding down, production
profiles from existing offshore platforms are decreasing, oil prices appear to have returned to a historical
supply/demand balance, and new offshore projects are getting delayed.
Is the 10% growth in revenue (in inflation adjusted real dollars) reasonable? Or are the provincial
government simply sticking their head in the sand?
From Federal Dependence to Oil Addiction

There is no better graph to demonstrate the changing economy of Newfoundand and Labrador
than the one represented in Figure 3.3. Inflation adjusted revenue is shown from both oil and
gas, and federal sources over the past 16 years. Also included is the % of total revenue coming
from the combined sources.

Figure 3.3: Federal and Offshore Contributions to the Revenue of Newfoundland


In 1997 the Province of Newfoundland and Labrador received nearly $3 billion (in 2015 dollars) from the
Government of Canada. This was in the form of equalization, cost shared projects, and health transfers.
This equaled almost 50% of the revenue from the province. These were tough times.

In 2013 the combined income between the 2 sources was about $3 billion. It is expected that when the
2014 consolidated public accounts are released this will be several hundred million less than the $3 billion
number.
In the period of 2015-2016 the provinces combined annual income from Federal and Offshore royalties
will be less than the federal sources alone, in 1997 in real dollars! This is a startling statistic, and one
which should send cold shivers through the spines of anyone who is concerned about the provinces
finances.
As long as our economy is strong enough that we will remain a have province, and not qualifying for
equalization, we will be in a difficult position. That is until Hebron royalties come online post simple
payout, or the price of oil returns to nearer to 90 or 100$ per barrel.
As was outlined within the post Its the spending stupid the province must be transparent in their
calculations of oil royalties going forward. Without this information placed in the public domain, and
with key inputs such as oil price and production profiles clearly visible, it is impossible to have meaningful
public debate on the provinces finances, or spending priorities.
However, there are several obvious facts which should be stated for the reader:
The first is that the existing fields are declining fast, and even if we return to historical oil prices, their
royalty payments to the provincial government would be decreasing. This is perhaps best documented in
the Wade Locke submission to the Hebron Public Review panel12. In his submission, Locke clearly
demonstrated how the oil royalties would be decreasing without Hebron. This is summarized within Table
3.2:

Table 3.2: Royalty Payments [Ref. Wade Locke Hebron Review Panel]
Secondly, Hebron is late and more expensive than was the case when Wade Locke presented to the
review panel. This has delayed the year of simple payout from 2019 to 2022, a fact reported by Tom
Baird , (a mathematics professor at MUN) on his twitter account following an access to information
request. The excerpt from the request is provided below:

12

http://hebronpublicreview.ca/wp-content/uploads/2011/07/Hebron-Public-Review-Commissioners-ReportFebruary-20121.pdf

The reader should be reminded that the royalty prior to pay out is a modest 1%. Table 3.2 shows that
Wade Locke anticipated royalties of $88 million per year from Hebron in the period of 2016-2020. If
payout is not achieved until 2022, then Hebron will likely be contributing less than $100 million a year in
Royalties for the next 5 years.
The reader is also reminded that within the current Estimates the department of Finance has predicted
oil royalties of $ 1.3 billion in the 2015-2016 fiscal year. If the price of oil does not rebound significantly,
considering the reduction in production profiles, then oil royalties will be less than $1.5 billion per year
for the remainder of the decade.
If federal government contributions to the province hold in the $1 billion range, then the province should
be planning for a combined contribution of the range of $2.5 billion, in total. When adjusted for inflation,
this is less that the province received from the Federal Government in 1997.
Brian Peckford was right in forecasting that Someday the sun will shine... and it did shine, but it did not
last long; a fact hastened by fundamental mismanagement of all too temporary wealth.

Personal Income and Sales Tax


Within the 2015 budget the province is planning a program of new taxes13 to assist with returning to a
balanced budget. This includes modest increases to income taxes, and the increase to the HST. Figure
3.4 provides a summary of the provincial revenue from both income taxes and sales taxes since 1997.
Again this is inflation adjusted data, coming from the public accounts.

13

http://www.budget.gov.nl.ca/budget2015/factsheets/Tax_Adjustments.pdf

Figure 3.4: Sales and Income Tax Revenues Inflation Adjusted


This increase in revenue from both sales tax and income tax over the past decade occurred with
simultaneous reductions in the levied rate. This dramatic increase was due not only due to the strong
local economy, but also the strong economy of Western Canada and the associated remittance payments.
However the increase, undoubtedly, was due to the robustness in world commodity prices (oil and
minerals).
With the collapse of the mining industry in Newfoundland and Labrador, and the ongoing weakening of
the oil industry, we are in a multi-year recession. Within the 2015 budget highlights document the
province predicts 5 years of negative growth, and reductions in employment. This is summarized within
Table 3.3 below:

Table 3.3: Key Economic Assumptions 2015 Highlights Document


Over the next 3 years the weakening in the long term oil price will have a pronounced effect on the local
economy. Unemployment will increase, and wages will decrease in real dollars. Bonuss linked to
companys profitability, and generous living allowances will disappear. This is on the local scene; the
collapse in the Alberta economy will also have a great impact, particularly in the rural areas of the
province. The impact is only now starting to unfold.
It is, therefore, not clear to the author how the revenues from both income and sales tax will hold steady
in the face of 4 years of negative growth. I do not believe that the increases in the tax rate will even be
sufficient to hold the current levels, let alone increase revenue.

The department of Finance should be pressured to explain the economic models used to project revenue
based on key economic inputs.
In the opinion of the Author, the provincial government should be planning for a 5% reduction in sales
and income tax revenue from 2014/2015 levels until the end of the decade. I am fearful with the
completion of the mega projects, and the long term outlook for commodity prices, even this small
reduction is overly optimistic. However, $2 billion in revenue (real 2015 dollars) is a reasonable forecast
for the remainder of the decade. Unfortunately, it would be not be surprising if the fundamental long
term weakness in the global commodities market will result in a 10-15% reduction in real sales and income
tax revenue by 2020.
Corporate Income Tax
With the increases in GDP fueled by oil and minerals exports, there has been an increase in corporate
income taxes collected by the province. This growth in real dollars is shown in Figure 3.5.

Figure 3.5: Corporate Income Tax


From the 2015 estimates document the province collected $470 million in corporate income tax in 20142015 and are forecasting an equivalent number for the 2015-2016 calendar year.
It is unclear to the author how the value of corporate income taxes will remain consistent.
The Minister of Finance should be pressured to provide clarity on this forecast. As Figure 3.5 so effectively
demonstrates, the corporate income tax in this province is pegged to oil prices and production levels.
Corporate Income taxes should therefore follow a similar trend to royalties?
In the Authors opinion $500 million seems to be a realistic upper bound on corporate income tax for the
remainder of the decade.

Other Sources of Revenue


There are additional sources of revenue for the provincial government which make up about 25% of the
annual total. This is summarized within Figure 3.6 in inflation adjusted figure. As Figure 3.6 shows these
revenues are relatively stable, and contributed on average about $1.8 billion to the province from 2006
to 2013. This should be a fairly reasonable assumption in real dollars for the remainder of the decade.

Figure 3.6 Other Sources of Provincial Revenue

What is the Source of the Additional Revenue?


In the above discussion the author has completed a very coarse Top Down assessment of the provincial
revenue for the next 5 years by each major category. This is an estimate which incorporates the general
weakening of the economy, and the likely long term softness in oil prices. The results of the above
discussion are summarized within Table 3.4.

Table 3.4: Authors Recommendation for Revenue Projections

In the opinion of the Author the province should be forecasting revenue of $6.8 billion per year, in 2015
real dollars. There should be no substantial increases in revenue until Simple Payout is achieved on the
Hebron field. In the current oil price environment this does not occur until 2022.
As shown in Table 3.1 the provincial government is much more optimistic in its revenue forecast for the
period from 2016 to 2021.
The province is forecasting a revenue in 2015-2016 which is nearly the same as is 2014-2015. This does
not make sense.
The figures do not even match those contained in the formal estimates document released by the
government as part of the 2015 budget. Statement II of the 2015-2016 estimates forecasts a $500 million
dollar reduction in revenue, year over year. Why does the budget highlights document, the glossy flyer,
not show a similar reduction in revenue? This is surely a question for the Premier.
However, the Premier should also explain to the people of the province the methodology used to forecast
the total revenue over the next 5 years. The projections contained in Table 3.1 are not reconcilable with
reality.
A more reasonable revenue would be $6.8 billion in real number for the balance of the decade. Figure
3.7 graphically illustrates the difference in the governments forecast and my own.

Figure 3.7 Authors Forecasted Revenue Versus Provincial Government


In the opinion of the Author the provincial government is overly optimistic in its revenue projections for
the remainder of the decade. The numbers seem inconsistent with the economic reality the province is
facing.
This is a very serious subject. Lofty projections of a return to a balanced budget surely have a disarming
influence on the battle for public opinion. However, the public should not be fooled.

Don Mills, CEO of Corporate Research Associates who recently spoke to the St. John's Board of Trade, is
correct when he states that we have a serious fiscal imbalance in this province. In fact, the imbalance is
so disturbing that drastic action is needed now. The glossy flyers, and the professional ads, merely serve
to provide the public an unfounded sense of security in the governments ability to manage.
I do not possess faith in our leadership that, given these considerable fiscal challenges, it will manage the
public purse properly.
Since 2008 public policy in this province has been based on oil prices above 120 $/barrel. The government
continues to manage for the long term as if it still shares this expectation. The view is maintained despite
the massive evidence which suggests oil will be in the 70 $/barrel range for a long, long time.
Premier Davis would be wise to listen to the 2011 version of his economic advisor, Wade Locke. In
2011 Wade Locke14 could have been writing the speaking notes used by Don Mills in 2015.
In short, the party is over. The problem is, simply, this government is oblivious to that reality. Premier
Davis is just one more in the recent string of Premiers content to keep buying new party dresses.

14

https://www.mun.ca/harriscentre/policy/memorialpresents/2011c/Wade_Locke_presentation.pdf

4 WHISTLING PAST THE GRAVEYARD NO MORE


As Posted on Uncle Gnarley on June 22, 2015

Cheaper oil is here to stay, and energy companies need to adjust to that reality. I do think the industry
needs to prepare for lower for longer" Bob Dudley, CEO, British Petroleum, April 21, 2015
Investors should brace themselves for more volatility in the oil market, with prices staying around
current levels for a while Rex Tillerson, CEO, Exxon Mobil, March 2015
Oil prices should reach a long-term equilibrium of $90 per barrel, but it is impossible to predict when
prices would return to those levels Oil prices were poised to remain volatile in the mid-term
Ben van Beurden, CEO, Shell
This is my fifth rodeo. Were going into a world thats going to be characterized by lower, gradually
rising prices and a lot of volatility. The shift for ConocoPhillips away from billion-dollar projects that
take years or decades to complete is rooted in a belief that crude prices could gyrate wildly for years to
come. Any price recovery in the near term will be modest, as slowing U.S. production helps push up
prices to between $70 and $80 a barrel within three years Ryan Lance, CEO ConocoPhillips
Im planning for five years of low oil prices, in the low $60s per barrel - Scott Sheffield, CEO, Pioneer
Natural Resources
"We're planning for $60 oil. I think there's still a lot of 'whistling in the graveyard' mentality. One could
hope for $75 oil but you've got to plan for lower." Stephen Chazen, CEO, Occidental Petroleum
We currently expect oil prices (Brent) to average around $75 per barrel for this year, below the global
marginal cost of production due to the current oversupply scenario, and increase gradually towards the
$85 per barrel mark over the next two years, as the supply becomes tighter due to the recent cutbacks
in capital spending by almost all major oil companies and the growth in demand picks up to more
normalized levels R.A, Walker CEO Anadarko
We've assumed prices for 2017 of around $80 per barrel and then a careful rise after that Eldar Saete,
CEO Statoil

Historians will view 2014 as the year in which the historical supply demand relationship was
reestablished for oil. The shift was driven by a number of factors though the chief reason is technological
advance. On the supply side, proven technologies in horizontal drilling and fracking are unleashing vast
reserves of shale oil and gas. On the demand side, machines that require oil are becoming much more
fuel efficient; curbing consumption in the developed economies. In the new economies of Asia, demand
for oil is slowing in those regions, too.
In so many ways the collapse in oil price is a technology story. The result is that price growth from 2007
to 2014, a period in which oil averaged over 100 USD/barrel, can be viewed as an anomaly. We are now
in for a prolonged period of volatility in which the lower prices echo the 20 year period following the oil

crisis of the 1970s. Figure 4.1 clearly communicates that the oil price spike from 2006 to 2013 may well
be considered just a spike15.

Figure 4.1: Inflation Adjusted View on Oil Price


A geopolitical crisis can always change the price equilibrium. But, as is evident from the quotes that
prefaced this post, oil companies are adjusting for a fundamental shift in the present oil economy. They
are cutting staff and reducing costs to an extent which documents their belief the slowdown is not a short
term phenomenon.
Due to our exposure to the oil and gas sector, Newfoundland and Labrador will be particularly hard hit by
the downturn. The province has been caught flat-footed. The collapse in current oil revenues (i.e.
royalties) have had a dramatic impact which is being mitigated only by massive government
borrowing. However, as the price remains depressed for longer periods, the reductions in other revenue
sources (Income tax, sales tax) will only exacerbate the revenue shortfalls. Alas, the long term solution is
not sustained borrowing.

15

http://www.zerohedge.com/news/2014-07-23/annotated-history-world-oil-price-shocks

The oil price collapse has necessitated the requirement to have a serious conversation and an action plan
for our future. A dose of fiscal reality, perhaps, is just what this province needs.
A Record of Stimulated Unsustainability
The Progressive Conservative Government started out with good intentions to manage this new energy
fueled wealth. Their tenure began in 2004 with a reduction in government spending. In 2007 the
government generated a long term plan to shape our energy strategy16. Contained within the Energy Plan
was a projection for long term oil prices, as shown in Figure 4.2.

Figure 4.2: Long Term Oil Projections 2007 Energy Plan


By 2008, the government had forgotten about those long term projections. They began to make long
term decisions based on short term oil prices. Taxes were cut, government spending was increased by
35%, and infrastructure projects were initiated. The fiscal policy changes were enabled by peak
production and record oil prices, which occurred simultaneously.
In consequence of all this stimulus, the provincial government took a fundamentally strong economy and
made it white hot. Salaries were raised at a pace far outpacing inflation. It fueled a real estate boom,
and caused an increase in the cost of doing business in Newfoundland and Labrador. It impacted our long
term competitiveness on the global market.
The governments economic advisor, Wade Locke, said that stimulus was a good thing17.
In 2013, it was difficult to argue otherwise. People were making small fortunes from real estate
valuations; new graduates in skill trades and professions could look forward to six figure salaries after a
couple years of getting their ticket. But, the boom was unsustainable.
Now, in 2015, it is clear that the government did exactly what it should not have done. Fundamentally,
they initiated stimulus during the boom. They made long term policy changes, such as increasing the size
of the public service, based on a short term spike in oil prices. They implemented major public works
projects at the exact time that we were executing mega projects. The measures contributed to cost
16
17

http://www.nr.gov.nl.ca/nr/energy/plan/pdf/energy_report.pdf
http://www.mun.ca/care/Locke_Presentation_Mills.pdf

overruns on Hebron, and on other offshore developments. The inflationary impacts will be the cause of
lower royalties when those facilities come on line.
Oil and government policy, from 2006 to 2010, initiated an unprecedented boom. However, it was the
stimulated expansion that fundamentally destabilized the long term economic stability of the
province. Now, as we commence a predicted contraction of the economy (i.e. a recession) following the
completion of several mega projects, the collapse in the oil price will only serve to magnify all those
negative impacts.
We need to ask: what should the government be doing in terms of fiscal policy?
Continued Stimulus or Expenditure Cuts?
The prevailing economic thought is to take advantage of low interest rates, and fuel stimulus to ride out
the economic downturn. Despite the claim of an austerity budget the government is actually increasing
spending in 2015. They are borrowing heavily to fund both infrastructure and current account (program
expenditures). The 2015 Budget is, in fact, a stimulus budget; it just happens that the stimulus is less than
in the previous five budgets!
Let's ask: is continued stimulus the correct action to take? Or, should the government of Newfoundland
and Labrador make long term adjustments to reflect the new oil reality, and to correct the fiscal
imbalance?
Based upon the analysis provided in Chapter 3, it is clear to the Author that the government should be
basing their mid-term policy on annual revenues in the $6.8 billion range. The Finance Minister is
projecting long term spending in the $7.5 billion range. As shown in Figure 3.7, in the absence of any real
reduction in government spending, or a major increase in oil prices, we will be running $700 million
deficits for the next five years.
This is the fiscal imbalance to which CRA pollster, Don Mills, recently referred!
To correct it, we must first recognize that we have one.
The government refuses any such acknowledgement.
They are happily whistling past the graveyard.

5 THE POLITICS OF BLIND OPTIMISM


As Posted on Uncle Gnarley on June 30, 2015

When it comes to recognizing the fiscal imbalance, the political leadership of the province are whistling
pass the graveyard. But government inaction is not limited purely to the deficit. They are failing to make
concrete actions on many of the larger issues facing the province today.
In a nutshell, they default to the politics of optimism. Whether revenues from Muskrat Falls or the vast
untapped wealth of the Newfoundland offshore, government policy and communications are entrenched
in hyperbole. This excerpt from the 2015 Speech From The Throne is an example:
Our government is buoyed with optimism as our people begin to come into their own, enjoying
the highest levels of income ever in our history, employment levels that are higher than a
decade ago, and a vast array of initiatives that enhance the lives of the oldest to the youngest
among us. Our government is managing the affairs of the province responsibly, progressively
and sustainably to ensure the incredible gains we have already achieved are eclipsed only by
the phenomenal gains that we are about to bring to fruition. Newfoundland and Labrador is
stronger today than it has ever been, and we are on course to achieve goals that will benefit
our people for generations to come. Our government is filled with confidence and optimism
that the prospects for Newfoundland and Labrador, both in the short term and over the long
term, are incredibly bright. Ours is a future that knows no bounds, and we shall ever remain
resolute in defence of this province we so dearly love Newfoundland and Labrador, proud
and strong.
This is a speech, and a theme, we have heard many times over the past 5 years. Of course, the politics of
optimism is an easy road for any politician. Difficult issues require tough and politically unpalatable
decisions. It is much easier to talk about future greatness; validating, by default, present day largesse.
Although we now experience a fiscal imbalance, nurtured since 2006, it can be corrected with common
sense, discipline and the ordinary application of restraint.
However, this government have had their heads in the sand with even the bigger issues. They have not,
for example, used the fiscal liberty afforded by offshore wealth to address the single largest issue they
have inherited; the provinces aging demographic. It is an issue even more daunting than the fiscal
imbalance.
The problem requires a plan that will span more than one or two election cycles; it will require a plan that
must bridge partisan politics. Most importantly, it should be concrete and achievable.
Like the provincial plan to return to balance budgets, the recently released "Population Strategy"18 does
a tremendous disservice to the issue. As Figure 5.1 so effectively demonstrates, the rural Newfoundland
and Labrador we picture in our memories is no more. Instead of young children playing on the shore, or
young families building a livelihood on the sea, rural areas will be, by 2040, almost 50% populated by

18

http://www.thetelegram.com/News/Local/2015-06-25/article-4194367/Province%26rsquo%3Bs-newpopulation-growth-strategy-short-on-specifics/1

seniors. When you study the projection of youth (0-19) and see how, in 2035, it is nearly the same as in
2016, you cant help but think that even this projection is optimistic.

Figure 5.1: Population of Rural Economic Zones


The servicing of rural Newfoundland, and the fiscal imbalance we currently have are undeniably linked.
Both are unsustainable in the long term. But the issue of our aging outports will inevitably be a crisis
within the next 20 years. No extent of government spending will avert this outcome in the majority of
rural communities.
Instead of facing the clear reality of the future of rural Newfoundland and Labrador, our politicians and
many leaders default to the rhetoric of blind optimism as demonstrated in the throne speech. They do
have their heads firmly in the sand!
The crown prince of the charlatans is none other than Nalcors CEO Ed Martin.
The Nalcor head does the province no favours when he refers to Newfoundland and Labrador as the next
North Sea19. Whether it is his claim to the new North Sea or to the amount of revenue that Nalcor will
one day provide to the government of Newfoundland and Labrador, Ed Martin has a level of optimism
which is not shared by his peers in the industry.
The problem is that the politicians seem to believe him because his proclamations are made without
challenge.

19

https://theogm.com/2014/10/20/newfoundland-future-outlooks-from-ed-martin-president-and-ceo-of-nalcorenergy/

Although I fully support Nalcors work in deepwater exploration, we should not be making long term policy
on 2D seismic, and on exploration wells yet to be drilled. We need a more cautious approach. One ought
to look to Greenland to understand how a world class oil play can be put on ice after a couple of
unsuccessful wells.
When it comes to fiscal planning in the current global oil environment, we need to err on the side of
caution. I suggest we should plan only for the new Bay du Nord discovery and the Hebron oilfield,
currently under construction. Those two new offshore assets might result in oil royalties of the magnitude
earned during the period 2008 to 2012.
If oil returns above 100$/barrel, we could have an additional $2 billion in annual revenue in the period
from 2025 to 2035. Beyond this expectation, we should not be counting on any new oil developments. If
they happen: great!
But they should not be the basis of our long term economic policy. The issue is central to the question I
raised in Chapter 3: should we continue to borrow, and inject economic stimulus from 2016 to 2023, the
likely start date of significant royalties from Hebron?
The answer to the stimulus question is clearly, NO!
We need to correct the fiscal imbalance now so that if and when a second oil boom occurs, we will have
the ability to build a true generational fund for when the oil runs out. We must learn from the mistakes
we made in the period 2006 to 2010. In that way we can properly plan in the event another boom occurs
in the period 2025 to 2035.
We must correct the current fiscal imbalance within the next 5 years. That is the only way we can ensure
that the royalties from a second oil boom are not used to simply maintain wage growth in the inflated
public service, and to service our ever increasing debt. If we get this second chance, we should use it for
the "generational fund"20 that the current group of politicians love to dream about.
That said, when you examine the aging demographic profile of the province, it is clear any generation
fund sourced from the second oil royalty boom (2025-2035) will not be a fund in the conventional sense
of the Norwegian endowment21. Rather, it will have to be used to implement a major resettlement
program for the hundreds of rural towns in this province. Any future generational fund will be simply
applied to correcting the impending demographic crisis in rural Newfoundland.
By 2030, the issue cant be ignored any longer. We will need the massive oil royalties from Bay du Nord
and Hebron to deal with the humanitarian crisis which outport Newfoundland will become. Crisis is
not too strong a word. I suggest the government and the public are naive to think otherwise.
We need to plan for that crisis now. We need to start trading in reality. The issues at stake are far bigger
than partisan politics.

20

http://www.cbc.ca/news/canada/newfoundland-labrador/paul-davis-announces-generations-fund-at-electionstyle-kickoff-1.3045215
21
http://www.huffingtonpost.ca/2014/01/11/oil-fund-norway-millionaires_n_4576887.html

6 GETTING BACK TO BASICS


As Posted on Uncle Gnarley on July 6, 2015

Oil has done many great things for Newfoundland and Labrador. It has diversified our economy,
generated wealth, provided tremendous opportunities for our young people, and given us a glimpse into
a truly global industry. Oil has fundamentally changed this province, the people, and our culture. We can
attribute to it a collective confidence on a level never conceived in the pre-oil Newfoundland and
Labrador.
But it can be argued that it has also incubated an undertone of both arrogance and invincibility, a condition
which has particularly plagued our political leadership. It has led to us to think, dream, and spend, as if
we had made the economic big leagues. From the mammoth Muskrat Falls public works project to the
35% increase in government spending, not once did we consider our exposure should oil prices return to
their historical (and far lower) valuations.
History has repeated. The oil price collapse has demonstrated just how weak our economy really is.
As we move into a Fall election, voters should seek a strong fiscally conservative government; one willing
to correct the fiscal imbalance which exists in the province. The problem needs to be corrected now in
order to ensure that if the second oil boom occurs in this province (2025-2035) we will have the ability
to make long term investments from the excess oil royalties; we should plan not to be left with even
higher debt, debt service costs and salary obligations to a bloated public service that the government
created during the past few years.
Within the next two posts, on Uncle Gnarley Blog, I will focus on the issue of short to medium term budget
planning.
I suggest it is vitally important, over the next five years, that we encourage our government to get back to
basics in the day to day business of providing strong management to government. We must correct the
fiscal imbalance and get back to balanced long term budgeting. Only by implementing tough measures
now, will we be able to truly benefit from the second anticipated royalty boom in the province and, in the
process, provide much needed long term sustainability.
This 5 year plan will involve ideas for both raising revenues and cutting taxes. But the plan must be
gradual. For that reason, the remainder of this post will consider the first step in reducing the fiscal
imbalance: raising new revenue.
Increasing Revenue A Modest Proposal
By nature I am a fiscal conservative. I believe that raising taxes hurts the economy. However, history in
this country, and in the province, clearly documents that premature tax cuts are more dangerous to our
long term economic stability than raising taxes.
The tax cuts of the 2006-2010 period were premature. Although Dwight Ball is correct when he states an
HST increase is a job killer, I believe the changes implemented in the 2015 budget were necessary.
Fundamentally, the current government has only corrected their previous mistake of lowering the HST
and cutting income taxes, in the first place.

As identified in Chapter 3, due to our heavy reliance on oil royalties, the small changes in taxation in the
2015 budget will have a minor impact on revenue growth. The small increases implemented in 2015 will
only serve to stabilize revenue in the face of a weakening economy.
The author will suggest some other modest, but important, actions the government can take to increase
revenue:
1.

Implement a tax on junk food:

The spiraling cost of health care is unsustainable. The problem is due, in part, to the relatively poor health
of Newfoundlanders and Labradorians, as documented in a recent report identifying 30% of residents as
obese. The problem is due in no small part to the lack of affordable fresh foods, and a culture that
promotes unhealthy eating.
By taxing junk food and fast food you are rightly penalizing the industries which contribute to an unhealthy
culture. By taxing junk food, you are following the governments practice of taxing vices such as tobacco,
and alcohol. Hence, it is very reasonable to consider a tax on junk food, which includes fast food. A
sample calculation on how much revenue the measure would generate is provided below:
Consumers
$/week
Suggested Tax
Revenue

400,000
$10 per week
15% (Double the provincial portion of the HST)
$30 Million annually

The increase may seem high, but this is a token tax! I suggest the revenue should be used to promote
healthy eating habits, and to subsidize local agriculture. In addition, I suggest one of the greatest legacies
of Muskrat Falls (possibly the only one) might be that surplus power is used to power large greenhouses
on the West Coast of the island.
But do not sigh if you are thinking a comparison with Sprung!
Greenhouses, located on the West Coast, would have a longer natural growing season. The initiative
would lead to rural diversification. It would stabilize the security of our food supply. Greenhouses which
grow tomatoes, peppers, greens, and other produce would serve to lower costs, and provide more
nutrition to citizens of the province.
This is not 1988. The province is now better ready for the development of a large greenhouse complex.
The real financial benefit: eventual savings in health care. The larger issue of health care is beyond the
scope of is paper, but there is considerable literature which establishes the link between healthier living
and lower health care costs.
The eating habits of Newfoundlanders and Labradorians are some of the worst in the world. The problem
very directly relates to our record of relatively high spending on health care services. I suggest it is time
to tax the culprits who produce these products and encourage local, healthy and sustainable nutrition.

2.

Corporate Income Tax

The Provincial Government should prepare and release benchmarking which compares corporate tax
rates in NL (combined with the federal tax) with other provinces in Canada, and against other jurisdictions
in the world. For reference, NL has the 4th highest corporate tax rate in Canada. Accordingly, we should
not forget that our corporate tax rate should remain competitive, internationally. Due to the federal
reductions offered by the Government of Canada, there may be an opportunity to increase provincial
rates. We need to, at least, be at the OECD average and better than the rates applied in other oil centers.
As shown in Figure 6.1, there may be an opportunity to increase corporate income tax by 1-2% and remain
competitive. As with income tax, the provincial government may be able to take the recent reductions
offered by the federal government.

Figure 6.1: Comparison of Tax Rates


For various reasons, the idea of raising corporate income tax is not one to which I subscribe. But the
necessity to increase revenue is influencing this recommendation. Presently, corporate taxes provide
about $400 million annually to the province. I recommend targeting a 10% increase. The measure has
the potential to yield $40 million per year in new revenue.
Corporate Income Tax

3.

$40 Million per year

Targeted Returns From Nalcor

Within the 2015 Budget Highlights document, the government alludes to the large revenues which Nalcor
will generate. They failed to mention two very relevant facts regarding how this revenue stream is
produced: (i) the province has been borrowing equity to provide Nalcor the complete payback it

promises by 2025 (the amount excludes the interest paid by the province) and (ii) any such revenue is
largely coming from the pockets of Newfoundlanders; essentially it is a tax on electricity rates.
The reader might wish to consider that the annual interest payment, alone, on the Muskrat Falls project
will be about $320 million (composed of interest on the $5 billion Federal Loan Guarantee and interest on
$3.2 billion borrowed provincial equity). If all the energy were sold on the open market, assigning no fee
for transmission, the sale will yield only about $195 million (3900 GWhr at 50$/MWH). Any revenues
coming from Muskrat Falls, therefore, are from our very own pockets.
A more balanced view of the revenue stream from Muskrat Falls can be found in the following reference
in an article posted on The Sir Robert Bond Papers Blog entitled "Muskrat Falls: delayed dividends, more
equity needed22.
That said, I suggest the province should mandate Nalcor to provide dividends to the province in an amount
sufficient, at least, to pay the interest on the equity the province is borrowing to pay for these projects.
The amount would be in the range of $120 million per year.
In the period of 2016-2020 an anticipated $120 million dollar dividend from Nalcor is a high expectation
anyway. Nalcor might achieve this target but only if it cuts costs, and reduces employees, and employee
benefits, like every other energy business in the world. Therefore, we might ask: why has Nalcor CEO Ed
Martin not implemented those market intervention strategies already?
Nalcor Targeted Revenue
4.

$120 million per year (the figure is higher post 2020)

Hibernia Holding Corporation

Most readers are aware that the Hibernia Holding Corporation (HHC)23 is a federal holding company which
owns the 8.5% federal stake in Hibernia. The company is listed in Calgary, not Newfoundland and
Labrador. It is a very profitable investment for the federal government.
The province has tried many times to get the federal government to transfer this 8.5% ownership. The
federal government has retorted with the entirely reasonable position that the stake should only be sold
at fair market value. (As an aside, I would like to know if this Alberta registered holding company pays
provincial corporate tax to the NL government.)
Although not a direct source of revenue, I suggest the province of NL should argue, given that the federal
government has already made their investment back on the Hibernia development, the revenues from
the HHC should now be re-invested in deep-water exploration in Canada. Federal government revenues
from the HHC should be reinvested in a Petroleum Incentives Program or PIP grant type of program for
Canadian deep-water exploration (all Provinces). This approach would certainly be a more palatable
position to the rest of Canada.
Uncle Gnarley might be mortified at the thought Nova Scotia might benefit from Hibernia revenues.
Likely, he remembers how Nova Scotia betrayed Newfoundland during negotiations for the original 1985
22
23

http://bondpapers.blogspot.ca/2013/02/muskrat-falls-delayed-dividends-more.html
http://www.albertaoilmagazine.com/2013/05/murray-todd-hibernia-holding-corp/

Atlantic Accord. However, I am hoping the industry has matured. Newfoundland and Labrador companies
would gain tremendous benefit from deep-water developments in Nova Scotia as well as in Newfoundland
and Labrador. Indeed, I suggest we should encourage more such corporations, not fewer. Two deepwater plays would, in fact, de-risk the long term outlook for Canadian offshore companies who, by and
large, are situated in St. Johns.
A joint lobby, by the coastal provinces, to use HHC revenue for deep-water exploration would perhaps
increase the likelihood of a positive result. The increased revenue from the deep-water exploration could
help the provincial coffers of NL, NS, and the federal government.
5.

Income Tax

The province has increased taxes on the highest earners. The author is in agreement with this tax
increase. However, I am not an advocate of additional increases in income tax.
Authors Note:
Since writing this initial post I have revised my opinion on the subject of income tax. A review
of the provincial income tax levels 24 suggest that perhaps we have room to increase income tax
without having significant impact on our competiveness. I would argue that the current financial
challenge would necessitate a 15% increase in the total income tax. This would contribute an
additional 150 million to the provinces revenue. This would keep us competitive to the Atlantic
Canada benchmark.

6.

Raising Minimum Wage

The debate regarding minimum wage has existed since Eisenhower implemented the concept in the
1930s depression era. I will not go into the debate either way, as there are many excellent papers
reflecting arguments, for and against, easily available upon a quick Google search.
Newfoundland and Labrador has some unique challenges which, in the opinion of the author, justify an
increased minimum wage.
I would recommend an increase to 15 $/hr.
Other fiscal conservatives might decry this position. They would argue over the loss of competiveness
and its impact on job growth. A higher minimum wage likely will have an impact on job creation. A massive
increase in minimum wage might even result in the disappearance of some minimum wage jobs. But, in
future, this province will be challenged to find sufficient people to fill those low paying jobs. Presently,
we struggle to get people on social assistance into the work force. We find it hard to attract and retain
immigrants.
Such a drastic increase in minimum wage would help overcome both these challenges. Naturally, the
measure would substantially improve the purchasing power for those people whose career depends on
the minimum wage. In turn, it will help the economy and increase tax revenue to the province. In addition,
precisely because an increase in minimum wage will help attract immigrants, it should be a key part of the
provinces population growth strategy.

24

http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

There are those who will argue that minimum wage will hurt business. They forget that, in the global
sense, Newfoundland and Labrador is not a cheap labor jurisdiction. We will never be able to compete
with China, Vietnam, Malaysia, or the southern United States, when it comes to wages. This is not 1996;
cheap labour should not be a cornerstone of our economic diversification efforts.
A problem of far greater concern is that Newfoundland and Labrador suffers from a massive problem of
competitiveness. The issue is not related to our minimum wage level. Indeed, there are many other deep
rooted reasons for our loss of global competitiveness. I would recommend the reader study the excellent
report recently generated by the Conference Board of Canada25 report on the subject.
One of the most intractable problems, exhibited by graphs contained in the Conference Board of Canada
report, is the alarmingly low amount of business expenditures on R and D in the province. Despite
numerous government programs to stimulate R and D spending over the years, the business communitys
record remains deplorable. This problem cannot be blamed on minimum wage workers. Lack of R and D
uptake sits squarely with the managers and owners of business.
Plenty of reasons abound to consider raising the minimum wage a progressive move. I suggest a $5 an
hour increase can be implemented over the next 5 years.

Figure 6.2: Rankings of R&D Expenditures


I submit, in the most polite terms, the ideas presented here are modest. Worryingly, there are limited
opportunities for new revenue generation in the province. Readers are encouraged to submit their ideas
in the comments section.
Finally, I would add it should be clear to all that the fiscal imbalance will not be corrected by increasing
revenue. That problem will require a fundamental change in how the province spends public money. The
next Chapter will examine some areas where spending controls might be implemented.

25

http://www.conferenceboard.ca/e-library/abstract.aspx?did=6956

7 RIGHTSIZING EXPENDITURES-WHERE THE REAL WORK IS NEEDED


As Posted on Uncle Gnarley on August 3 and 6, 2015

John Maynard Keynes is perhaps one of historys most influential economists. His theories regarding the
requirement for state intervention to moderate the natural boom-bust cycle of an economy has been
especially en vogue since the financial crisis of 2008. The basic premise of the theory is that government
should borrow in periods of slow economic growth (or during a period of retraction), invest in
infrastructure, and then manage the economy until it is stronger.
In Newfoundland and Labrador, since 2006, the government has perhaps done the opposite of what
would be advocated by Keynes. Despite a strong economy fueled by mining and offshore developments,
the Provincial government commenced, in 2006, a series of programs to further stimulate the economy.
They were represented by a general increase in spending of some 35% in real dollars, tax cuts, and a series
of large infrastructure developments. The latter included the massive Muskrat Falls public works project.
The result was that in 2012 the political leadership proudly proclaimed our economy to be white hot
The white hot economy was fueled by government stimulus, which, in turn, inflated salaries, drove up
project costs, and allowed housing prices to increase at a pace far outside of inflation. It was simply not
sustainable and I am deeply afraid it will have a long term negative impact on the economy.
The result is that with an economic downturn driven by low commodity prices the province does not have
the financial strength to be able to implement additional stimulus. (I say additional as we are presently
running a $2 billion cash deficit).
Newfoundland and Labrador is an economic nomad. We must get back to basics.
As shown in Figure 3.7, a more realistic estimate of government revenue would suggest that government
spending has to be reduced by about 10% to be sustainable over the next 5-10 year period. In the opinion
of the author, the government should implement a 5 year plan to remove at least $700 million annually
from the spending side of the budget, representing 10% in real dollars.
Cutting 10%, in real dollars, is a daunting task. However, it is a required action for a responsible
government to make. After studying the estimates, I have attempted to identify where cuts might be
make. The following is a list of the modest ideas of the author. Comments and suggestions are welcome
in the comments section of the blog.
1.

Public Service

In 2013 the province spent $3.8 billion on salaries. Based on a long term revenue of $6.8 billion, the
provincial government will be spending 55% of their revenue on salaries. Next to commodity pricing, the
size of the public service is the biggest threat to economy of the province. The salary commitments will
preclude the province from making key infrastructure investments, lowering taxes or other key initiatives
to help diversify the economy. As our population ages, and the requirements for health care increases,
the ability to serve these needs will be limited by the number of people the province has on staff.

The salary growth of the public service employees will also limited by the size of the public service. The
top employees in the provincial government should, therefore, be just as concerned about the size of the
public service, as I am!
There should be no doubt that any reduction in public spending needs to start right here. The author
recommends that the government implement the following actions:

10% head count reduction in all departments other than health. This includes Nalcor,
MUN, CONA, and other government agencies.
5% head count reduction in health.

However, in the public interest, union agreements will have to be ignored. The reductions should be
across all levels of government, and all positions (management and front line workers). But it should not
be based on seniority. It should be based on performance! The province should get rid of the dead wood!
As most people in business will tell you, a 5%-10% cut in head count will actually lead to better output.
The reason is that if you reduce head count based on performance, as opposed to seniority, you maintain
your best employees. The lowest common denominator is increased, and the improved output is
increased. Managers will tell you that the bottom 10% of staff take 30% of their time to manage.
I am sure people will laugh when they read this recommendation. My mother, who is a long time NAPE
organizer, certainly did! She told me that the union would never agree. The union management would
never agree, but what about the membership?
Most people are not oblivious to the government's predicament. They know that their future raises, and
pensions are all threatened by this fiscal reality. Most union members also know that the ability to remove
under-performers, will actually make life better for the average worker. People dont like working
alongside dead wood. It makes their job harder, and their workplace less pleasant.
The province needs to tackle the size of the public service, first by cutting poor performers, but remaining
staff ought to have the opportunity for better compensation. I suggest they should be offered an annual
bonus mechanism linked to oil prices. If the price of oil increases, and there is an increase in revenue,
then part of that upside can be shared with them. This type of bonus mechanism would represent a better
compensation model than long term increases to salaries.
Of course, the unions would have to agree. On this account, I am not optimistic!
However, I would mandate that NAPE (and other unions) put the proposal to their membership. The
membership should have an opportunity to give input into the direction of the required austerity. Given
the choice of a 5 year wage freeze, and a strong likelihood of a cut based on seniority, or a 10% cut based
on performance, I am pretty certain that human nature would prevail.
After explaining this to my shop steward mother, she lamented: in a secret vote, I would probably vote
yes to that proposition.

A cut based on performance based on seniority is the only way to maintain quality of service while facing
our current economic realities. This should result in savings of ~250 million per year. The cuts should be
implemented over a 3 year period.
But I am fearful that even this magnitude of a cut will not be sufficient.
2. Professional Services26
As documented in Chapter 3, government spending on professional services has gone from $280 million
per year (1997-2003) to almost $500 million a year in real dollars. As recently documented in the AGs
Report, many issues remain unanswered regarding how this work is identified, and how the contracts are
awarded. I am not sure if people in government truly recognize how out of step the province is with OECD
best practices for awarding such work. By comparison, the system in this province is in great disrepair.
In the face of the current reality, I would cut $75 million from professional services over the next 3 years.
This is a coarse analysis. But departments should be tasked with doing the work in-house. Any work that
has to be subcontracted, should be done in a manner that utilizes the public tendering system. No longer
should consultants be selected by the Minister, with budgets based on a proposal, as opposed to a
competitive tender. In addition, distribution of work among consultants should be based on performance,
rather than on political connections.
I believe a good part of this targeted savings proposed could be achieved with true public tendering, using
professional services only for real requirements; those that truly cannot be provided in-house. One
example of an unnecessary consultancy is the engagement of a consultant in to review how consultants
are engaged. This is work that can easily be conducted in-house; the skill-set available at Confederation
Building is simply not that deficient.
But the first step in cutting cost is to understand what comprises the $500 million spent each year in
professional services. It is a staggering number; one that is completely disproportionate to virtually any
metric for a province of its size and budget.
3.

Executive Council

The amount spent on executive council has grown from $19 million in 1995 (in 2015 dollars) to $60 million
in 2015. There are several actions which should be immediately implemented:

26

Womens Policy Office: The province spends $4.3 million per year on this Office. I would take this
outside government, and give 50% of the budget to the Status of Women Council to undertake
the mandate.

Office of Climate Change and Energy Efficiency: This is an office with a budget of $1.13 million. I
would eliminate it, and transfer the responsibilities to the existing staff within the Works Services
and Transportation.

Please note that following this post the Author realized that a portion of Professional Services is allocated to
Medical Doctors, and not all truly consulting services.

Office of Public Engagement: The Office has an annual budget of $5 million. I would remove it.
It should be completed by the existing communications people in each government department.
Alternatively, the government should remove the communications staff from each department.
There are simply too many communications staff in government.

Human Resources Secretariat: Consolidation of the several of its departments including opening
doors, strategic staffing, strategic management - too many managers.

Office of Chief Information Officer hold all enhancements to IT programs.

Labrador and Aboriginal Affairs Office annual budget $4.2 million. With 4 MHAs I am sure the
budget of this department could be cut 50% if not eliminated entirely.

Muskrat Falls Oversight Committee: This committee is duplicating work that Nalcor completes
internally; it provides little, if any, real oversight of the project. Mandating Nalcor to post all
internal monthly reports on the internet would negate the need for this entire oversight exercise.
With the information in the public domain, the media would complete the role of the oversight
committee, in its current form.

Communications: Again, we are a province of only 500,000 people. I suggest a review of the
entire government communications with the goal of benchmarking the staffing complement to
private industries of similar size.

4. Legislature
The Legislature division of government has a $30 million budget in 2015. In 1995, its budget was $10
million, in 2015 inflation adjusted dollars. There has been considerable growth in the cost of the services
this allocation is intended to fund. They include: the office of the Auditor General, Chief Electoral Offices,
Citizens Representative, Child and Youth Advocate, and Information and Privacy commissioner.
I would reconcile the Child and Youth Advocate, Information and Privacy Commissioner, and the Citizen
Representative into a single Ombudsmen office. Some may argue that this would weaken the service to
the weakest members of society. However, history has shown the greatest weakness of these separate
offices is the public actually knowing they exist. A single agency for which those in need could contact,
would be a much stronger in this regard.
Could a single agency perform any worse than the current incantation27?
5. Advanced Education and Skills
This is a broad ranging department with an annual budget of $870 million representing a considerable
expenditure on grants as well as programs. I would recommend a full review of this department,
particularly in the area of rural presence. As part of this discussion we need to challenge the requirement

27

http://www.ctvnews.ca/canada/n-l-s-child-advocate-not-aware-of-most-deaths-since-2009-1.2022498

that this department should have representation in so many nooks and crannies of the province.
However, some immediate actions might include:

Atlantic Veterinary College: Eliminate the $1.2 million grant for seats. Let students apply
competitively.

MUN: An additional cut of $20-30 million. Memorial University is getting fatter to server fewer
local students. A reality check is needed. The first of those reality checks is that a province of
500,000 people cant have a world class university, across all faculties. It is irresponsible to even
suggest it. The university should review whether we should even continue with some of the more
expensive faculties. Perhaps the med school, for example, should be reviewed. Although the
budget comes via the Department of Health, the MUN medical school has an annual budget of
$60 million per year. It accepts about 80 students per year; only about 60 are local. Is it not more
cost efficient to pay other universities to train our medical students in more of the disciplines?
Medical schools are controversial topics. So too is tuition. Newfoundlanders tuition is too low,
and has to be increased. Tuition fees should be increased by 25%.

College of the North Atlantic: The College has 17 campuses located in Newfoundland and
Labrador. This model was acceptable 25 years ago, when students from Fogo had perhaps never
been further than Gander. Things have changed. Students from rural areas of the province are
decreasing in numbers, but they are becoming worldlier. CONA has to reconcile their campuses.
I would target a reduction to 5.

6. Transportation and Communications


Within the annual Estimates document which is produced with each annual budget, there is an
informative graph which presents Where the Money Goes. The following is the excerpt from the 2015
budget Estimates28

Figure 7.1: Where the Money Goes - 2015

28

http://www.budget.gov.nl.ca/budget2015/estimates/estimates_2015_16.pdf

In 2015 the province spent $324 Million in transportation and communications. As shown in Figure 7.2
this value has increase by about 120% in real dollars since 1995.

Figure 7.2: Transportation and Communications Costs Inflation Adjusted (In Millions)
One cant review the budget allocation for Transportation and Communications without having a much
larger discussion about services to rural Newfoundland. Those costs need to be reduced, allowing an
historical reference point to guide future expenditures.
One controversial topic is the cost of providing coastal boat services. I suggest that, within the next five
years, we must cut all coastal boat services to any area having a population of less than 500. Taxpayers
can no longer support communities where the cost of a single service is completely disproportionate to
its economic contribution. We pay $80M annually on coastal services for less than 15,000 people. That is
$5,000 per person per year! As the rural population declines the per capita number will just increase. As
politically unpalatable as all governments regard the subject, I suggest we need a discussion now, to
properly plan for specific community relocations.
A similar discussion can be had regarding road and bridge upkeep. The provinces infrastructure is in very
poor condition. Like the coastal boats, this infrastructure cannot be maintained in the smaller areas for a
diminishing population, regardless of what politicians say.
Notwithstanding the need for a 10% cut across all government expenditures, transportation and
communications cannot be neglected. I would target a reduction of $30 million from current annual
expenditures.
7.

Health

Like transportation, there can be no discussion about downsizing government in the absence of a real
debate on the future of health care. I suggest the discussion needs to be focused on three key points.
They are:

I.
II.
III.

finding efficiencies in system delivery


public private components of the system - we need to deliver more services with the use of
private companies.
rural services

Given our aging population, it is not reasonable to decrease the total health budget (other than through
the reduction of staff as mentioned in item 1 in the previous post). The province should hold the line on
current expenditures as it seeks ways of providing more efficient services.
The health care field contains many places where efficiencies can be found and abuses eliminated. We
need to begin identifying the most egregious and start correcting them. But real change should begin at
the top and not just with administrators. Physicians should not be the oligarchs of Newfoundland society.
They are public servants, too.
8.

Pensions

Although the province has recently made some much needed change to the public service pension plan29
governments claims to long term sustainability seems suspect, considering how minor the changes.
Additional data should be released to substantiate the claims, especially the assertion of an 84%
probability the plan will be self-funded in 30 years.
I suggest the government needs to implement the following changes immediately:
1)
2)
3)
4)

New employees should have a defined contribution plan rather than a defined benefit.
The minimum retirement age should be 65 or 35 years of service.
There should be no double dipping on pensions permitted.
Pensions should not be based on the best 5 or 7 years earnings of an employee. The pension should
be indexed exactly to the average annual salary over the full duration of the employees period of
employment.

Anyone in the private sector who has directed that their financial advisor determine their annual RRSP
contribution, to ensure 70% of their best 7 work years, indexed, and with medical benefits, will truly
understand how difficult it is to retire at age 60.

Each of the eight ideas for cutting 10% from the annual budget could justify a lengthy and detailed post.
So, these comments constitute a mere beginning. Hopefully, readers will weigh in with their own views.
However, one thing is certain: as I studied the estimates in order to address the question where would
I cut?, I quickly concluded it is impossible to arrive at real cuts unless a fundamental shift in the way
services are delivered to the rural areas of the province is contemplated.
In addition, whether it is the College of North Atlantic which operates 17 separate campuses, or the
unrealistic demands for a plethora of health care services in areas with small populations, we cant have
a real discussion on reducing the budget without addressing the two other major issues.

29

http://www.exec.gov.nl.ca/exec/hrs/pensions/PSPP_presentation.pdf

The first of those is the aging demographic, which is a crisis unfolding in front of our eyes - in both the
rural and urban centers.
The second is the reality that the small outport way of life cant be resuscitated, in spite of the amount of
government money devoted to the attempt.
My personal story reflects that reality.
The town in which I spent my formative years has a population of about 250 people; the average age is
65. I will never live permanently in that community again. This is a choice made irrespective of economic
opportunity or job prospects. Like many of my generation, I simply do not want to live in a town of 250
people. In 20 years, this small town will be reduced to 200 people; the average age will be 75.
The inevitability is that unforced resettlement will continue to occur.
High oil prices have enabled a decade of inaction by government on the problems represented by
demography. I suggest that convenience is at an end. The economic realities represented by 50$ oil,
declining production, and limited federal transfers, will impose on us the necessity to make tough
decisions, and they will need to be made within the next 5 years. The catalyst will simply be financial
disparity. The first of the baby boomer cohort will start reaching age 70 in 2016; the cost of sustaining
small rural towns will be exacerbated, even if the provinces financial situation improves.
The impending provincial election campaign is a time when those issues, and the ideas to deal with them,
should be discussed in earnest; though that is not likely. Our politicians seem inured to fiscal reality.
Whether it is the promise of student grants, the refusal to reign in the size of the public service, except
through attrition, or the willingness to ignore the possibility tax hikes may be required, they are content
merely to keep borrowing.
With a total NL public debt nearing $12 billion (Muskrat Falls included) we are nearing a very
uncomfortable place for a population of 0.5 million. Puerto Rico, the Caribbean archipelago that is an
American territory, has just defaulted on its public sector debt. It has reached $72 billion. Puerto Ricos
population is 3.5 million; seven times our own. The math is as compelling as it is disturbing. We should
think about that.
Finally, in the future posts, I will conclude this Budget Colloquy by presenting an alternative 10 year fiscal
plan.

8 OH YES IT IS A CRISIS
As Posted on Uncle Gnarley on January 13, 2016

The final post intended to conclude the Budget Colloquy on the Uncle Gnarley Blog did not appear during
the Summer, as intended. It was just as well. The pre-Christmas budget Update has provided a more
current, but no less grim, appraisal of our worsening problem. The budget Update has shown that the
government has experienced both a collapse in revenues, and, unbelievably, an increase in program
spending30 during 2015.

Table 8.1: Fall 2015 Update


Based on a more realistic assessment of future revenues there is now a $2 billion deficit forecast for each
of the next 5 years. In the opinion of the Author, even these revised estimates for future revenue remain
grounded in optimism. Without real cuts in spending the deficits will only worsen from those predicted
by the government.

Table 8.2: 5 Year Forecast Provided in Fall 2015 Update


On a cash basis, the province is now predicting $15.4 billion in new borrowing over the next 6 years! The
figure assumes there will be no further increases in the equity required for the Muskrat Falls project.
Again I believe this is an overly optimistic assumption, and it would be wise to assume that at least another
30

http://www.fin.gov.nl.ca/fin/publications/2015_mid_year_update.pdf

$1 billion of new borrowing will be required before that boondoggle is completed. A figure of $16.4 Billion
is a staggering amount of new debt for province of our size. It is not something that should even be
contemplated.
I started this budget colloquy with a quote from the 1933 Amulree Report31, which reviewed the status of
the Dominion of Newfoundland, and which ultimately lead to the abandonment of democracy. The
parallels with the period 1920 to 1930 and the past 10 years are eerily similar. For those who doubt the
severity of our current situation, Table 8.3 will provide cold comfort.
Table 8.3 was completed by Ed Hollett of the Sir Robert Bond Papers Blog32. It compares the current
program of borrowing with what happened to Newfoundland leading up to the end of responsible
government.

Table 8.3: Summary of Borrowing as a Share of Expenses


If we have learned anything from voluntarily giving up our democratic franchise, is the massive burden of
debt servicing and the impact it has on governments ability to function. In the period from 2015 to 2020,
debt servicing costs will increase from $820 million to $1.4 billion annually. Without a return to a balanced
budget, this will only continue to increase.
We are in the debt spiral. Urgent action is required. It cannot be delayed.
In my opinion, we are in a period of prolonged oil price collapse; similar to that which occurred in the early
1980s (refer to figure 4.1). If this comparison holds, and we have 10-15 years during which oil prices
remain below 80 $/barrel (real price) we can expect that our deepwater development will be stalled, and
payout on Hebron will be delayed. New revenue growth will be very difficult to achieve in a low oil
environment. Government can not wishfully hope for a return of 100$ oil. We cannot plan to annually
borrow $2 billion in perpetuity either.
31
32

http://www.heritage.nf.ca/articles/politics/amulree-report-introduction.php
http://bondpapers.blogspot.ca/2016/01/metrics-nlpoli.html

Every year we borrow $2 Billion will generate nearly $80 million in new debt servicing costs. Every year
we delay cuts, requires that we cut another $80 million in program spending to return to a balanced
budget. Any eventual reduction in our bond rating will add another $50-75 million annually in debt
servicing costs.
I repeat Newfoundland and Labrador are in the debt spiral. Urgent action is required. It cannot be
delayed.
Although I appreciate the Ball government does not want to accelerate the softening of the local economy,
cuts will have to be made. They are inevitable. What the Liberal government must realize is that we still
have a relatively strong economy. It is much better to start the cuts now, as opposed to waiting until
March 2017 as suggested by their consultation road map.

The work has been done by the government departments to understand where the cuts are required, and
where are potential sources of new revenue.
To repeat the essential theme contained in the Budget Colloquy posted during the summer of 2015: we
must raise revenue and cut spending. These measures have to be implemented over the next 3 years.
Time truly is of the essence.
The new revenue sources, noted in Chapter 6 Getting Back to Basics, are summarized below:
New Sugar Tax
Corporate Income Tax
Nalcor
Income Tax
Restate HST increase
Total New Revenue

30 Million
40 Million
100 Million (They need to tighten their belts as well)
150 Million
150 Million
470 Million

The spending cuts identified in Chapter 7 Rightsizing Expenditures are summarized as:
Public Sector Layoffs
Professional Services
Executive Council
Advanced Education
Transportation and Coms
Total Spending Cuts

250 Million
75 Million
10 Million
50 Million
30 Million
415 Million

These measures may have been originally interpreted as extreme, they would not reduce the current
deficit by even 50%!!! The spending cuts are not even equivalent to the new debt servicing charges
between 2015-2020!
That is why the suggestion, we are in a debt spiral, is neither ill-defined nor unwarranted. Indeed,
without substantive action we threaten every aspect of our society from health care and education to
existing pension obligations.
More borrowing will only exasperate the situation. Delay cannot be entertained. It is a crisis.
To conclude, we need to immediately start raise taxes to the tune of $500 million annually. We need to
cut spending by $700-800 million. Every year of delay increases the required cuts by $80 Million.
We are undeniably in a crisis. I am deeply afraid that a delay of another 1 year in consultations will be the
final death nail. Substantive action is required today.
But it is also important that we collectively recognize the long term damage which horribly unwise
government decisions, made in the period 2006 to 2010, have inflicted. These mistakes were incubated
in prosperity, and recent governments did not take adequate measures to correct them.
The period of 2006 to 2015 will be referred to as the decade of squandered opportunity for Newfoundland
and Labrador. Urgent action is required for us to survive.