Guest Post written by “JM”

The final post intended to conclude the Budget
Colloquy on the Uncle Gnarley Blog did not appear during the Summer, as
intended.  It was just as well. The
pre-Christmas budget “Update” has provided a more current, but no less grim,
appraisal of our worsening problem.

The mid-year budget “Update” has shown that the
government has experienced both a collapse in revenues, and, unbelievably, an
increase in program spending
 during 2015:    

Table 1:  Fall 2015 Update
Based on a more realistic assessment of future
revenues there is now a $2 billion deficit forecast for each of the next 5
years.  In the opinion of the Author,
even these revised future estimates remain grounded in optimism.  Without real cuts in spending the deficits
will only worsen from those predicted by the government.

Table 2:  5 Year Forecast Provided in Fall 2015 Update

On a cash basis, the province is now predicting
$15.4 billion in new borrowing over the next 6 years!  

figure assumes there will be no further increases in the ‘equity’ required for
the Muskrat Falls project.  Again I
believe this is an overly optimistic assumption, and it would be wise to assume
that at least another $1 billion of new borrowing will be required before that
boondoggle is completed. A figure of $16.4 Billion is a staggering amount of
new debt for province of our size.  It is
not something that should even be contemplated. 

I started this budget colloquy with a quote
from the 1933 Amulree Report, which reviewed the status of the Dominion of
Newfoundland, and which ultimately lead to the abandonment of democracy.  The parallels with the period 1920 to 1930
and the past 10 years are eerily similar.   
For those who doubt the severity of our current situation, Table 3 will
provide cold comfort. 

Table 3 was completed by Ed Hollett of The Sir Robert Bond Papers Blog.  It compares the current program of borrowing
with what happened to Newfoundland leading up to the end of responsible

Table 3:  Summary of Borrowing as a Share of Expenses

If we have learned anything from voluntarily
giving up our democratic franchise, it is the massive burden of debt servicing and
the impact it has on government’s ability to function.   In the period from 2015 to 2020, debt
servicing costs will increase from $820 million to $1.4 billion annually.  Without a return to a balanced budget, this
will only continue to increase.  

We are in the debt spiral.  Urgent action is required. It cannot be

In my opinion, we are also in a period of prolonged
oil price collapse; one similar to that which occurred in the early 1980’s.  If this comparison holds, and we have 10 years
period which oil prices remain below 75 $/barrel (real price), we can expect
that deepwater development will be stalled, and payout on Hebron delayed.  New revenue growth will be very
difficult to achieve in a low oil environment. 
Government can not wishfully hope for a return of 100$ oil.  We cannot plan to annually borrow $2 billion
in perpetuity either.

Every year we borrow $2 billion will generate
nearly $80 million in new debt servicing costs. Every year we delay cuts, will
eventually require that we cut another $80 million in program spending to
return to a balanced budget.  Any eventual
reduction in our bond rating will add another $50-75 million annually in debt
servicing costs, and required cuts.  

I repeat Newfoundland and Labrador are in the
debt spiral.  Urgent action is required.
It cannot be delayed. 

Although I appreciate the Ball government does
not want to accelerate the softening of the local economy, cuts will have to be
made.  They are inevitable.  What the Liberal government must realize is
that we still have a relatively strong economy. 
It is much better to start the cuts now, as opposed to waiting until
March 2017 as suggested by their consultation road map.   

The completion of our resource projects will
assure the economy, in 2017, is weaker than today.

Cuts should not be delayed. 

The work done by the government
departments is adequate enough to understand where the cuts are required, and where are potential
sources of new revenue.  More
consultation is not required. 

To repeat the essential theme contained in the
Budget Colloquy posted during the summer of 2015: we must raise revenue and cut
spending.  Time truly is of the essence.  Regular readers may remember that during the
summer the Budget Colloquy series offered a series of measures to correct the
fiscal imbalance in the province. 

The new revenue sources noted in the post “Getting Back to Basics”  are summarized below:

New Sugar Tax                           $ 30
Corporate Income Tax                   40 Million
Nalcor                                           100
Million (They need to tighten their belts as well)
Income Tax                                  150
Restate HST increase                  150 Million
Total New Revenue                $ 470 Million
The spending cuts identified in the post
entitled “Rightsizing Expenditures” 
  are summarized as:

Public Sector Salaries                  $250 Million
Professional Services                      75 Million
Executive Council                            10 Million 
Advanced Education                        50 Million
Transportation and Coms                30 Million
Total Spending Cuts                 $415 Million
These measures may have been originally
interpreted as extreme.  But the reader
should note that, combined, they would not reduce the current deficit by even

To demonstrate the impact of debt
servicing, the spending cuts noted above are not even sufficient to compensate
for the $600 million of new debt servicing charges identified by the government
in their 2015 Budget Update!

This is why the suggestion, “we are in a debt
spiral”, is neither ill-defined nor unwarranted. Indeed, without substantive
action our debt will threaten every aspect of our society from health care and education
to existing pension obligations.   

More borrowing will only exasperate the
situation.  Delay cannot be
entertained.  We should look to 1929 for
an historical reference. 

To conclude, we need to immediately start raise
taxes to the tune of $500 million annually. We need to cut spending by $700-800
million.  Every year of delay increases
the required cuts by $80 million. 

We are undeniably in a crisis.  I am deeply afraid that a delay of another 1
year, in consultations, will be the final death knell for the province. 

Substantive action is required today.  


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.


This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?