BUDGET UPDATE: LEADING FROM THE REAR

Ask yourself
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 Provincial Budget is annually predicated upon consistently high returns from
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.    
For those reasons, just as we would expect a portfolio manager to insulate our most important investments from excessive risk, the Finance Minister ought to be guided by a set of policies that protects the public purse against the worse effects of volatility.         

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. 

He will run deficits in a time of plenty.  He will do anything but make necessary financial decisions.  Now, he has acknowledged that changes to the current budget deficit, found in the Update, are
purely accidental.

The
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.
   

By any
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.

The current price is just under $US 109.  Industry forecasters predict oil prices, out to
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. 

The Minister
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.

In his Fiscal
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
packets? 

The Minister
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”.

Most
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
exchange.

This Tory Government
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.

The Minister
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.

Oil and Gas
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.”

A small
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.

Though Governments
change, the incumbent should not empty the cash register for fear the government
that replaces it will spend all the savings.

As it
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
difference. 

This is
flawed thinking.  It is the practice of
undisciplined and short-sighted leadership.

The Minister
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. 

Given Tom
Marshall`s track record thus far, like the reduction in the Budget deficit, that
would truly be “unexpected”.
Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.

NALCOR (Masquerading as ‘Hydro’)LIVES IN AN UPSIDE DOWN WORLD

If a Big Mac costs McDonalds $10 to produce and it is sold for $1.50, McDonalds will go out of business. They would not declare a profit!

REMEMBERING BILL MARSHALL

Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.

2 COMMENTS

  1. Their inability to forecast short term oil prices gives me no confidence in their ability to predict oil or other prices five to ten years out. Yet, they are touting Muskrat Falls as the "least cost" option on the basis of outdated forecasts that fail to take these radical developments into account.

    Their arrogance and intransigence, in the fact of rapidly changing energy realities, goes beyond mere stupidity. It is obvious that nefarious forces are in play with this development and it is being pushed forward for reasons that do not meet the objective criteria a project of this cost magnitude should entail. It is a mega project for a negative return and will merely serve to keep this province poor….all due to the wasteful and greedy attitude of some politicians and business interests.

    In my view it is a shameful and willful display of avarice by both the government and the elite. Shame on them and shame on the people for allowing this travesty to continue! In recent years, we have seen people living under dictatorships rise in the streets and give their lives to win their freedom from the apparatus of self-serving dictators and their minions. In NL, the government is acting in a similar manner when it comes to exploiting the people's resources for the benefit of the few. They have stymied efforts to obtain truthful information about anything and can't seem to make any decisions that are done for the right reasons…Premier Dunderdale's protestations to the contrary. Yet, the people, for the most part, are being complacent and willfully ignorant of the systematic destruction of resources of the province. Ironic then that the Premier used the symbol "Lest We Forget" as a backdrop to her intransigence and arrogance.

    The PC government have squandered the people's legacy to maintain their hold on power but most of them will be rewarded with a golden pension when they are relegated to the back benches in 2015. It is extremely frustrating to me that the "legacy" the people will inherit is going to be one that leaves the proverbial cupboards bare. They always viewed the "oil" dollars as a vote buying mechanism and they have betrayed the province by their refusal to be careful stewards of the people's resources.

    They had the greatest opportunity of any government in the history of the province to "get things right" but instead have turned a silk purse into a sow's ear. Tom Marshall's financial management is, and has been, a complete disaster but he is only one member of the Cabinet. Are they all that weak and incompetent or is the allure of power too great?