this question: if the investment firm that manages your RRSP placed 33-50% of your
money in the volatile commodities market, i.e. oil, would you not, at least, question its competence? Likely, you would move
your funds elsewhere.
the same volatile commodity. NL has been bestowed a valuable natural resource; but we do have the responsibility to carefully manage its inconsistent value. The international oil market is constantly under pressure and hence subject to significant price changes.
The 2013-14 Provincial Budget Update delivered by the
Minister, on December 2nd 2013, was a reminder that this Finance Minister is comfortable
leading from the rear. He has made it
clear he plans no reform to the Public Service Pension Plan though the annual
unfunded liability continues to mount.
Provincial Budget comprises 33% of direct revenues from oil royalties; related
corporate and personal income tax and HST revenues raise Government’s oil
related take to at least 50% of total revenues.
standard, such a dependency on a single historically unpredictable commodity is
too great. Enhanced oil recovery from improved directional drilling techniques and changes
to recovery methods of shale oil and gas have also changed the energy narrative to one
focussed on peak “demand” from one, for two decades, preoccupied with peak “supply”. Whether the Minister wants to recognize the fact or not the energy universe is changing.
2017, at $US 90.00/barrel. That is not
the direction that will embolden believers in the Finance Minister Tom Marshall’s crystal ball.
In this Province, every dollar of change in the oil price represents $20-25
million to the provincial coffers, depending on the level of the $US.
needs to bring more certainty to a budgetary process that is now, at best,
guess work. Had NL a more diverse
economy, one in which oil revenue represents a far smaller percentage of total revenues, the issue would be less urgent. But,
that is not the construction of our economy nor does it characterize our fiscal situation.
Update, the Minister states the deficit will be $113.2 million less than
forecast. That means the forecast
deficit will be down from almost $564 million to $450 million. While the changed is welcomed he should not expect applause. How did that reduction occur when oil
royalties were off by $112.5 million, mining taxes off by just over $30 million and
with collective agreements having added $62.5 million to public service pay
says it was the result of “unexpected delays” in infrastructure projects, an
increase in Federal Government Transfers, and modest savings across
departments. In other words, most of the savings were not ‘managed’ savings. In
the Minister’s own words, they were “unexpected”.
significantly, oil production
was off by 2 million barrels; a worse effect was forestalled by a slightly
higher than forecast world oil price and by a more favourable USD-CAD currency
is unlikely to ever earn a reputation for adopting a ‘conservative’ approach to
public spending. That fact
notwithstanding, NL’s Budget should not be constantly on a collision course
with uncontrollable events. The Minister
needs to commit to a policy of discounting his consultant’s oil price forecasts,
on an annual basis, by at least 10-15%. Such an approach might offset the worst effects of volatility in both price and production.
should be content to allow any surplus, in consequence of this policy, to be
applied against the debt which is the same as saying that any surplus can then be applied against the effects of an inevitable and unfavourably large price swing.
Let it be understood, using such a discount
policy, the Minister should be planning, at worst, annual balanced Budgets.
This is hardly radical stuff in this era of
historically high revenues.
Financial Journal, a major source of data and analysis on the industry, recently
made this comment in a story entitled OSLO: NEW OLD CITY: “Despite the recent change of government,
Norway knows that its oil and gas will not last forever, and plans to ensure
that for as long as possible, its citizens will be able to benefit from this
all-too-temporary good fortune.”
country, of just 5 million people, Norway has refused to let prosperity go to
its head. It has a far larger oil
industry than ours but it understands that someday its vast oil fields will run
out. Our oil industry is already past
peak production, notwithstanding recent discoveries; we should attempt to be wiser
than recent budgetary practices suggest.
change, the incumbent should not empty the cash register for fear the government
that replaces it will spend all the savings.
stands, our Government’s approach to fiscal policy is to spend every cent it
can get its hands on; if revenue from oil drops, causing a deficit or elevating
the one currently forecast, it believes it should just borrow the
flawed thinking. It is the practice of
undisciplined and short-sighted leadership.
may feel his approach will enhance the Government’s re-election chances. But, in time, the public may give far more
credit to a Government more willing to lead from the front, than the rear.
Marshall`s track record thus far, like the reduction in the Budget deficit, that
would truly be “unexpected”.