Guest Post written by JM
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.
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.
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.
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 when 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 than the government created during the past few years.
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 when 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 than 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.
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 day to day business
of providing strong management to government.
years, that we encourage our government to get back to basics in 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.
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.
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
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.
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.
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 PART II, 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.
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 like to suggest some other modest, but
important actions, the government can take to increase revenue:
important actions, the government can take to increase revenue:
1.
Implement a tax on junk food:
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.
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
government’s 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:
penalizing the industries which contribute to an unhealthy culture. By taxing junk food you are following the
government’s 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 400,000
$/week $10 per week
Suggested Tax 15% (Double the provincial
portion of the HST)
portion of the HST)
Revenue $30
Million annually
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.
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.
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.
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 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.
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
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 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.
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 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.
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.
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 $40
Million per year
Million per year
1.
Targeted Returns From Nalcor:
Targeted Returns From Nalcor:
Within the 2015 Budget Highlights document
the government alluded 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 government alluded 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 $225 million (4500 GWhr at
50$/MWH). Any revenues coming from
Muskrat Falls, therefore, are from our very own pockets.
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 $225 million (4500 GWhr at
50$/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 equitry needed.
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 equitry needed.
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.
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?
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 $120 million per year (the figure
is higher post 2020)
is higher post 2020)
2.
Hibernia Holding Corporation
Hibernia Holding Corporation
Most readers are aware that the Hibernia Holding Corporation (HHC) 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.
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.)
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 deepwater 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 deepwater exploration (all Provinces). This approach would certainly be a more
palatable position to the rest of Canada.
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 deepwater 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 deepwater 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 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. John’s.
thought Nova Scotia might benefit from Hibernia revenues. Likely, he remembers how Nova Scotia betrayed
Newfoundland during negotiations for the original 1985 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. John’s.
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.
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.
3. 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.
earners. The author is in agreement with
this tax increase. However, I am not an
advocate of additional increases in income tax.
4.
Raising Minimum Wage
Raising Minimum Wage
The debate regarding minimum wage has existed since
Eisenhower implemented the concept in the 1930’s 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.
Eisenhower implemented the concept in the 1930’s 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.
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.
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.
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
province’s population growth strategy.
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
province’s population growth strategy.
There are those who will argue that minimum wage will
hurt business. They forget that, in the
global sense, Newfoundland 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.
hurt business. They forget that, in the
global sense, Newfoundland 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 Canada report on the subject.
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 Canada 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 community’s 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.
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 community’s 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.
minimum wage a progressive move. I
suggest a $5 an hour increase can be implemented over the next 5 years.
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.
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 fiscal imbalance will not be corrected by increasing revenue. That problem will require a fundamental change
in how the province spends public money.
Part VI of this series will examine some areas where spending
controls might be implemented.
controls might be implemented.
_________________________________
Editor’s Note:
JM’s essays include: IN NALCOR WE TRUST, Delusion and Deception (Part III), and The Snow Job (Part I). The very latest Posts, on the 2015-16 provincial Budget, include IT’S THE SPENDING STUPID and The Budget Colloquy (Part 1): Put Him In The Round Boat Til He’s Sober, The Budget Colloquy (Part 2) Revenue Projections: Close Your Eyes, Make a Wish, Hope for the Best and The Budget Colloquy (Part 3) Whistling Past the Graveyard No More. Having chosen to retain his anonymity, JM is prepared let his articles be judged on the research and argument each contains.
I don't think a huge minimum wage hike in a province with a 13% unemployment rate will help our "competitiveness" or increase government revenue.
You want *more* federal subsidies for the oil industry? Give me a break.
How many new hires will be needed by govt to implement and administer a junk food tax? How much consulting money? How much for public consultations, media relations, advertising, etc? There is a tricky issue of what qualifies as junk or not, e.g., I could see how soft drinks are a good target but then we would have to exclude club soda (because it is just carbonated water) and any other soft drink without sugar or artificial sweeteners. Also, we already have a form of junk food tax/deposit on soft drinks to encourage beverage container recycling. Great fodder for radio call-in shows!
So it's all very complicated. We made great strides in simplifying our sales tax system by moving to a valued added tax in 1997 (GST/HST). We also saved millions by no longer having to employ retail sales tax collectors and auditors. Let's not take a step backwards with a new sales tax and another layer of bureaucratic administration.
Don't get me started on greenhouses.
I thought General Eisenhower was a busy officer in the US Army during the 1930s; how did he find time to bring in a minimum wage for the civilians?