FISCAL CHOICES AFTER REOPENING: A FRAMEWORK FOR DISCUSSION (Part 3)

Guest Post by David Vardy and Ron Penney

FISCAL CHOICES AFTER REOPENING:
A FRAMEWORK FOR DISCUSSION
 
PART
THREE

We
had intended to send this to the Telegram to ask if it would publish the two
parts as guest columns as it had for the first two.
 
The
Telegram has been very good to both of us and has published the many opinion
pieces we wrote both together and individually on Muskrat Falls and other
public policy issues over the past decade. In the same period the Telegram has
done an excellent job though it’s columnists, such as Russell Wangersky, Pam
Frampton and Brian Jones, on Muskrat Falls, and other important public policy
issues, as has its reporters such as Ashley Fitzpatrick.
 
The
recent decision of the Telegram to suspend further columns from Brian Jones is
not what we expect from the Telegram, the last bastion for freedom of the press
in Newfoundland and Labrador.
 
As
Voltaire said “I may not agree with what you say but I will defend to the death
your right to say it.”
 
As
retired senior public servants we may disagree with the picture he has painted
of the public service, but there should be no sacred cows in Newfoundland and
Labrador.
 
The
Telegram has succumbed to political correctness, in deference to our powerful
public sector unions. Our only recourse is to condemn the actions of the Telegram
and to decline to offer our opinion pieces to it in the future.
 
On
Saturday, May 16 and Tuesday May 19, the Telegram published two quest columns
on our likely post-pandemic fiscal situation and how we might start the process
of meeting the challenges posed by the dire situation facing us. Parts Three
and Four expand on those ideas by setting out two approaches with specific
fiscal initiatives which we and the Government of Canada could undertake.
 
After
a lockdown of eight weeks, beginning with the declaration of a public health
emergency on March 18, 2020, the province has begun to reopen its economy, in a
very cautious and prudent approach. During the lockdown our budget process has
been in limbo, despite the growing demands upon government and the collapse of
revenues, particularly revenues from offshore oil production. While we have yet
to produce a budget, New Brunswick brought down its budget on March 10, 2020,
along with a fiscal update.
 
The
time has come now to face the fiscal reality. A large part of that reality was
facing us before the pandemic and has been accentuated by it. We are referring
to a pre-existing deficit of about $1 billion dollars. To this must be added
the incremental cost, on a recurring basis, of the Muskrat Falls project, which
we estimate to be another $1 billion. Then there is the impact of the pandemic,
both on our revenues and on our expenditures, which could add another $2-3
billion.
 
We
do not know how long the pandemic will be with us or whether there will be a short
recovery (one to three years) or a prolonged and more painful recovery (five to
ten years). Recovery from the effects of both the pandemic and the collapse of
oil prices could take some time because of the added debt.
 
Related:
The
Dependency Model
There
are two basic options. One is the politically expedient approach which places
the entire burden on the federal government and absolves the province from any
responsibility. Under this approach we would continue to run a massive deficit,
with no end in sight, adding to the crushing burden to be carried by future
generations.
 

We
could not possibly borrow all of this money without extraordinary federal
support, including, but not limited to, federal purchase of our bonds or a
guarantee by the federal government to lenders that GOC will stand behind them.
It was federal intervention, through the Bank of Canada, that enabled GNL to
sell its Treasury Bills just a few short months ago and, without that
intervention, the province would not have been able to meet its payroll or
other obligations.
 

This
we call the “Dependency Approach”. It recognizes that politicians may not be
prepared to take any hard, politically risky decisions. These could involve
tough fiscal measures, both on spending and taxation, based on a comprehensive
program review. The Dependency Approach places most of the burden on the
federal government. It ignores


      Tiff Macklem, New Governor BOC
the burden we place on future generations or on
other Canadians. It assumes that interest
       
rates will remain low and that the
GOC will serve the role of “enabler” to allow us to borrow and to dig
ourselves, deeper and deeper, into unsustainable debt.
 
We
see little evidence that the GNL has taken measures to raise revenues or
contain spending. The approach taken by GNL in negotiating with public sector
unions appears to be predicated on the Dependency Approach, committing to wage
increases and maintaining staff levels. This reduces the flexibility of the
province, moving along the path of least resistance. Will wage increases
awarded to union personnel be mirrored with administrative, executive and
elected public servants?
 
The
Self-Reliant Model

The
second option, the “Self-Reliant Approach,” is one where the province attempts
to reduce its structural deficit by taking hard choices, even though the
savings or new revenues are not, on their own, sufficient to deal with the
enormous scale of the problem. This second approach we call the “Self-Reliant
approach,” where the province takes tough revenue and expenditure decisions but
seeks federal support through a mutually agreed three year plan. It attempts to
place our finances on a sustainable basis.
 
The
Self Reliance approach takes a longer term perspective and recognizes the
responsibility of the present generation to avoid shifting an unbearable burden
onto future generations. This is a tough but realistic approach but one which
politicians are unlikely to initiate on their own, without public prodding.
 
The
Dependency Approach is enabled when the GOC comes to the rescue of the province
by purchasing provincial bonds (through the Bank of Canada) or else guaranteeing
our bonds. The rescue we witnessed a month ago was achieved through the Bank of
Canada’s purchase of Treasury Bills, which provided short term relief.
 
It
remains to be seen whether the federal government will extend this approach by
purchasing longer term bonds, thereby creating greater long term stability.
Will all provinces be treated alike and will there be penalties or limits for
those provinces who borrow too much?
 
Deficit
reductions for the province: What measures must we take?
 
If
we are to follow the Self-Reliant Approach then we have to be prepared to take
action to reduce our expenditures and to increase our revenues. What are the
options for GNL?  A comprehensive program
review of the entire public sector would be needed to answer that question but
we can identify some of those options.
 
The
previous PC administrations adopted a policy of investing equity into oil and
gas developments. Up to this point in time over $1 billion has been invested
and commitments have been made for further investment. The Liberal government
has continued with this approach and, along the way, have created another
administrative apparatus, the Oil and Gas Corporation.
 
The
province should strategically terminate these investments and, over time,
liquidate its investments, while dismantling the Oil and Gas Corporation. It
was never a good idea to take an equity position in oil. It is inherently
risky, as we are now finding out. We should take our share in royalties and let
the oil and gas companies take the risk.
 
Before
the creation of Nalcor Energy the province had one Crown Corporation, NL Hydro,
which generated electrical energy and operated high voltage transmission lines.
NL Hydro also distributed power in rural areas of the province, while
Newfoundland Power, an investor-owned utility, distributed power throughout the
rest of the province, including the more densely populated Avalon Peninsula.
With the completion of Muskrat Falls NL Hydro should take over from Nalcor,
which should be dismantled, along with the Oil and Gas Corporation.
 
A
thorough review of our expenditures is required, focusing in particular on the
two largest components, health and education. While it may not be practical to
target the national per capita average spending there should be a
rationalization of our system to achieve substantial savings in health and
education.
 
Much
of the growth in public administration since Confederation has taken place in
crown corporations. These agencies now need to be reassessed and government
needs to be dramatically downsized. Health and Education boards have been
consolidated to the point where regional input from citizens has virtually
disappeared.
 
It
is time to dismantle the boards and place the responsibilities back into
government departments. In addition there should be a complete restructuring
and downsizing of governments, including all departments and agencies, some of
which can be transferred to the private sector, such as the Liquor Corporation.
 
Memorial
University has grown in recent years by offering low student fees to both
resident and international students. Our high student enrolment appears to be
sustained by deep-discount tuition relative to other Canadian universities. The
needs of our own residents suggest that a smaller student body would be
appropriate. Tuition for international students should be comparable to what
they pay elsewhere in Canada. Is this really the time to create a new Law
Faculty?
________________________________________
Editor’s Note: Part 4 will be posted on Thursday, June 4, 2020.

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