Guest Post Written By: JM
Government of Newfoundland and Labrador has a spending problem. The problem can be masked by the temporary
windfall revenues. That is what occurred in 2008-2012.
However, a responsible government plans it’s long term spending based upon a
sustainable, realistic revenue stream.
revenue for the next 5 years. It
predicts that in 5 years the province will return to balanced budgets. It exhibits sufficient colored graphs, and statistics
to even seem believable. But believable it is not.
The following summary is taken from that “highlights” document.
1: Consolidated Surplus / Deficit from
the 2015 Budget Highlights
province is predicting that for the 2014/2015 and 2015/2016 fiscal years revenue will be just under $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, on which the province’s rests its forecast return
to a balanced budget.
the government’s projections for future revenue grounded in reality, or is it
merely wishful thinking? Part II of this
colloquy on the 2015 Budget will attempt to answer the question.
Revenue and Gross Expenditures made from 1997 to 2013, and a
forecast to 2020/2021. The actual data
comes from the “Consolidated Statement of Operations” within the annual public
account documents. The forecast data is taken from the 2015 budget highlights information provided in Table 1. The 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.
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 was 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.
Revenue By Source – Inflation Adjusted
our return to balance budgets will be achieved only by the forecast 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.
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 delayed.
adjusted real dollars) reasonable?
simply sticking its head in the sand?
Dependence to Oil Addiction
demonstrate the changing economy of Newfoundand and Labrador than the one represented in Figure
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.
3: Federal and Offshore Contributions to
the Revenue of Newfoundland
and Labrador received nearly $3 billion (in 2015 dollars) from the
Government of Canada. The funding was received in the
form of equalization, cost shared projects, and health transfers. This sum equaled almost 50% of the revenue from
the province. Those were tough times.
is expected that when the 2014 consolidated public accounts are released this sum will be several hundred million dollars less than the 2013 figure.
province’s combined annual income from Federal and Offshore royalties will be
less than the federal sources alone in 1997 in real dollars!
one which should send cold shivers down the spines of anyone who is
concerned about the provinces finances.
province, one that does not qualify for equalization, we will be in a difficult
position. That is certainly the case until Hebron royalties
come online post “simple payout”, or until the price of oil returns to nearer to 90
or 100$ per barrel.
forward. Without this information being
placed in the public domain, 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.
facts which should be stated for the reader:
are declining fast, and even if we returned 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 The Hebron Public Review panel. In his submission, Locke clearly demonstrated how the oil royalties would decrease without Hebron. This is
summarized within Table 2:
expensive than the case when Wade Locke presented to the review panel. This
has delayed the year of simple payout from 2019 to 2022. This was 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:
royalty prior to pay out is a modest 1%. Table 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, Hebron will likely be contributing less than $100 million a year in Royalties
for the next 5 years.
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, oil
royalties will be less than $1.5 billion per year for the remainder of the
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 amount the province received from the Federal Government in 1997.
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.
Income and Sales Tax
is planning a program of new taxes to assist with returning to a balanced budget.
The list includes modest increases to income taxes, and the increase to the
provincial revenue from both income taxes and sales taxes since 1997. Again, this is inflation adjusted data coming
from the public accounts.
4: Sales and Income Tax Revenues –
sales tax and income tax sources, over the past decade, occurred with simultaneous reductions
in the levied rate. The dramatic
increase was due not only to the strong local economy. The strong
economy of Western Canada and the associated remittance payments also played an important role. However, the increase was undoubtedly also due to
the robustness in the world’s commodity prices (oil and minerals).
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 below:
3: Key Economic Assumptions – 2015
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.
Bonus’ linked to companies’ 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. This impact is only now starting to unfold.
author how the revenues from both income and sales tax will hold steady in the
face of four years of negative growth.
not believe that the increases in the tax rate will be sufficient even to hold current levels, let alone increase revenue.
pressured to explain the economic models used to project revenue based on key
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.
projects, and the long term outlook for commodity prices, this small
reduction may be overly optimistic.
of the decade. Unfortunately, it would
be not be surprising if the fundamental long term weakness in the global
commodities market results in a 10-15% reduction in real sales and income
tax revenue by 2020.
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 5.
5: Corporate Income Tax
province collected $470 million in corporate income tax in 2014-2015 and forecasts an equivalent number for the 2015-2016 calendar year.
value of corporate income taxes will remain consistent.
to provide clarity on this forecast. As
Figure 5 effectively demonstrates, the corporate income tax in this province
is pegged to oil prices and production levels. Shouldn’t corporate income taxes, therefore, follow a similar trend with royalties?
seems to be a realistic upper bound limit on corporate income tax for the remainder
of the decade.
Sources of Revenue
revenue for the provincial government which make up about 25% of the annual
total. This is summarized in Figure
6, an inflation adjusted figure. As graphic depicts, revenues are relatively stable, and contribute, on average, about $1.8 billion to the province from 2006 to 2013. This should also be a fairly reasonable assumption, in real dollars, for the remainder of the decade.
Other Sources of Provincial Revenue
Source of the Additional Revenue?
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 4.
4: Authors Recommendation for Revenue
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.
government is much more optimistic in its revenue forecast for the period from
2016 to 2021.
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
dollar reduction in revenue, year over year. Why does the budget highlights document glossy
flyer not show a similar reduction in revenue?
This is surely a question for the Premier.
revenue over the next 5 years. The
projections contained in Table 1 are not reconcilable with reality.
$6.8 billion in real number for the balance of the decade. Figure 7 graphically illustrates the
difference in the government’s forecast and my own.
Authors Forecasted Revenue Versus Provincial Government
provincial government is overly optimistic in its projections for revenue
for the remainder of the decade. The
numbers seem inconsistent with the economic reality the province is
budget surely have a disarming influence on the battle for public opinion.
Related to this article:
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
the government’s ability to manage.
leadership that, given these considerable fiscal challenges, it will manage the public purse properly.
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. This view is maintained despite the massive evidence which suggests oil will be in the 70 $/barrel range for a long, long
to the 2011 version of his economic advisor, Wade Locke. In 2011 Wade Locke could have been writing the speaking notes used by Don Mills in 2015.
is just one more in the recent string of premiers content to keep buying
new party dresses.