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Canada John Ivison: Flat-broke Newfoundland is a cautionary tale for other big spending governments in Canada

13:15  15 may  2021
13:15  15 may  2021 Source:   nationalpost.com

N.L. in financial crisis of its own making, time to rein in public spending: report

  N.L. in financial crisis of its own making, time to rein in public spending: report ST. JOHN'S, N.L. — The financial crisis facing Newfoundland and Labrador puts the province at risk of being unable to pay public sector salaries and keep hospitals running, a government task force report released Thursday concludes. The report titled The Big Reset says that to correct course, the province needs to rein in public sector spending, re-evaluate its contracts with unions and dismantle the provincial energy corporation. “We are by noThe report titled The Big Reset says that to correct course, the province needs to rein in public sector spending, re-evaluate its contracts with unions and dismantle the provincial energy corporation.

Danny Williams holding a sign: Newfoundland and Labrador Premier Danny Williams speaks at the Economic Club of Toronto on May 3, 2007. © Provided by National Post Newfoundland and Labrador Premier Danny Williams speaks at the Economic Club of Toronto on May 3, 2007.

The federal government has long looked down its nose at Newfoundland and Labrador as an economic sink-hole, so you can understand the pride premier Danny Williams must have felt when he told the Toronto Economic Club in 2007 that his province had “turned the fiscal corner.”

Williams’ government recorded a budgetary surplus that year, allowing it to bring in the biggest tax reduction in the province’s history. Williams boasted in that year’s Throne Speech that his province was self-reliant and “master of our own house.”

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Yet, just 14 years later, the province has hit a debt wall that means it cannot sell its bonds on international markets.

Things started to go downhill in 2008, when the province entered a period of high spending by hiring thousands more public servants and paying wage increases far beyond inflation.

As a devastating report prepared for Newfoundland and Labrador premier, Andrew Furey, by former Canada Post chief executive, Moya Greene, points out, “financial restraint was not in the mind of the general public or the leadership of political parties.”

By 2020, Newfoundland and Labrador had the highest expenditures, deficits and net debt per capita of any province.

What no-one knew was that GDP had peaked in 2007, along with oil production. As resource prices dropped, growth stagnated and investment levels fell.

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Oil revenues were being used as an annual revenue source, rather than squirrelled away in a future fund, and the province funded the Muskrat Falls hydro project, which has run billions over budget.

While revenues saw peaks and troughs, expenditures went in only one direction.

Spending rose from $4.97 billion in 2004/05 to $8.97 billion this year – an increase of 80 per cent.

Governments spent more than they brought in, borrowing every single year to add to the debt load. Cash deficits have added around $1.9 billion annually, resulting in credit downgrades and difficulties selling provincial bonds.

Net debt is officially $14.4 billion, or $27,575 per person – the highest of the provinces. Even at today’s low interest rates, the provincial government is paying 11¢ on the dollar in interest payments that could otherwise be spent on services (the federal equivalent is around 8¢).

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However, the Greene report suggests gross debt is more reflective of the province’s true position, given the difficulty it would face selling assets. If you toss in public pension liabilities and indebted government businesses like Nalcor Energy, proponent of Muskrat Falls, borrowings rise to $47.3 billion, or $182,000 of debt for every worker.

As former premier Dwight Ball admitted to Prime Minister Justin Trudeau in a letter last year: “To put it bluntly, our recent attempts to finalize our borrowing program…. have been unsuccessful. We have no recourse to raise necessary funds to maintain the operation of government, including our health care system.”

That SOS call to Ottawa signalled the death of the “masters of our own house” dream.

But the pain of repairing the province’s finances is going to be felt far beyond its borders.

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Federal Finance Minister Chrystia Freeland told the finance committee this week that spending in her first budget is “reasonable and sustainable.” But that fails to take into account the fact that spending by many provincial governments is neither.

The Parliamentary Budget Officer’s latest fiscal sustainability report made clear that current fiscal policy is not sustainable for many provinces, thanks to rising health care costs and aging populations.

Newfoundland and Labrador may be in the worst shape but it is not alone. Federal government sources concede it is the expired canary in a coalmine where other provinces are already showing signs of gasping for air.

The PBO sustainability report forecast that only Quebec, Ontario and Nova Scotia have stable fiscal outlooks.

A report by the Conference Board of Canada for the premiers predicted that, while the federal fiscal situation will improve in the next 10 years, the provinces and territories will see their deficits double from a combined $46 billion this year to $103 billion in 2030-31.

a man wearing a suit and tie:  Andrew Furey, premier of Newfoundland and Labrador which has the highest expenditures, deficits and net debt per capita of any province. © Paul Daly/The Canadian Press/File Andrew Furey, premier of Newfoundland and Labrador which has the highest expenditures, deficits and net debt per capita of any province.

You can poke holes in those assumptions – both studies assume five per cent annual increases in health care costs, even though provinces have contained health spending increases to 3.6 per cent over the past decade.

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But rising debt levels are undeniable – Ontario is set to reach a 50 per cent net debt to GDP level within three years and Quebec isn’t far behind.

Even with tax increases and/or spending reductions, the federal government is going to have to step in, a point Trudeau has already acknowledged. The day after the federal budget, he told reporters that he is committed to increasing transfers to the provinces. “We look forward to discussions about how we can make more investments in the long term,” he said.

Remarkably, given this concession, Freeland’s “sustainable” budget directed very little spending to addressing the systemic unsustainability of provincial finances.

Premiers called for an additional $28 billion a year in health transfers; in her budget, Freeland limited increases to three per cent.

The fiscal stabilization program for provinces that see significant drops in revenue remains tightly capped and, while the equalization program will see a 20 per cent increase in the next five years, that does not help a province like Newfoundland and Labrador, which does not qualify because of its high per capita revenues.

The reason is clear. In pre-election budgets, governments prefer to get the credit for increasing Old Age Security for voters with the lowest poverty rates in the country, rather than write cheques to provinces, for which they will get no credit.

But Ottawa won’t be able to sit on the sidelines indefinitely.

The Greene report makes numerous recommendations for reforming fed-prov fiscal arrangements.

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Greene pointed out that the equalization formula is insensitive to aging populations and the cost of providing services. The province has the highest healthcare spending per capita in the country and, in common with all other provinces, the government in St. John’s would like to see the federal contribution rise.

The Greene report also called for non-renewable resource revenues to be removed from the equation that calculates a province’s fiscal capacity.

“Equalization will have to be revisited,” the report concludes.

The federal fiscal stabilization program is another area where the report argues for reform, given the stringent nature of the qualification rules (a five per cent decline in non-resource revenues and a 50 per cent fall in resource revenues.) Newfoundland hasn’t qualified since 2015.

Finally, it recommends a new federal loan facility be established to enable the province to borrow 10 and 30-year bonds at federal rates.

Dealing with these problems is going to cost Ottawa billions more, adding to a debt load that has doubled since the Trudeau government came to power.

Sources say the plan is to get through the pandemic before turning to a comprehensive plan that takes in health transfers, child care, long-term care and pharmacare.

That suggests no-one in Ottawa has calculated the fiscal impact of an increased federal contribution to the provinces.

When Trudeau committed in principle to more “investment”, he had no clue what impact it might have on the federal finances. It is not something that seems to concern him unduly.

The level of confidence that all will be well is eerily similar to Danny Williams’ misplaced sense of security in 2007.

Most economists believe that the federal finances will remain sustainable, as long as growth rates outpace interest rates. The budget suggested a nominal growth rate of 3.7 per cent in the 2020-25 time period, compared to forecast 10-year bond yields of 1.9 per cent in the same period.

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The Trudeau government is spending as if sunny days will last forever.

But the skies are bruising.

Public debt charges are on course to rise to nearly $40 billion a year by the end of the forecast horizon. They may increase well beyond that, if investors deem Ottawa is on the hook for soaring provincial debt.

Chrystia Freeland sitting on a table:  Finance Minister Chrystia Freeland delivers the federal budget in the House of Commons as Prime Minister Justin Trudeau listens, in Ottawa on April 19, 2021. © Sean Kilpatrick/The Canadian Press Finance Minister Chrystia Freeland delivers the federal budget in the House of Commons as Prime Minister Justin Trudeau listens, in Ottawa on April 19, 2021.

There is nothing written in the Constitution to say that the federal government has to step in to prevent a provincial debt default but politically it would be hard not to intervene, according to Don Drummond, adjunct professor at the School of Policy Studies at Queen’s University.

Just as in Newfoundland, federal public service salaries have been hiked substantially, rising from $39.6 billion in 2015 to $47.5 billion in 2020. The numbers of bureaucrats has swollen by around 10,000 each year to reach a total of 380,000, even as expenditures on consultants has risen $6 billion a year.

The national debt is on course to reach $1.5 trillion within five years, from $615 billion when the Trudeau government took office.

Freeland pointed out in committee that the debt to GDP ratio will peak this year and then dip marginally. But the budget is explicit that the debt-to-GDP ratio won’t get back to pre-pandemic levels until 2055 – and that’s if you buy into the government’s optimistic assumptions.

The lesson from Newfoundland and Labrador is that you can’t live beyond your means indefinitely. Governments should make provision for unexpected events that lead to higher interest rates and brutal spending cuts. Drummond has a simple answer: “Somebody has to raise taxes.”

Absent decisive action, the federal government could go the same way as the most indebted provinces.

The only difference in Ottawa’s case is that if the federal government does fall off the debt wall, there will be no benevolent senior level of government around to put it back together again.

• Email: jivison@postmedia.com | Twitter: IvisonJ

Charlottetown Festival returns with Newfoundland play celebrating 'the whale man' .
Gillian Anderson says playing Margaret Thatcher in ‘The Crown’ was the most technically difficult role of her career, as she said she was worried people would brand it a "car crash".

usr: 4
This is interesting!