Tag Archives: fiscal crisis

Between ‘The Rock’ and a hard place

Newfoundland's debt is as immoveable as a neolithic obelisk

Newfoundland’s debt is as immoveable as a neolithic obelisk

For an object lesson on the capricious nature of economic dependence on fossil fuels, we need not cast our weary eyes westward to Alberta. We need only scan the eastern horizon to where Newfoundland and Labrador hover into pale view.

Not long ago, we may recall, this province was Canada’s miracle child – for decades, a perpetually slow learner that, seemingly overnight, became the highest achiever in the land.

Oil and gas reserves were plentiful (they still are) and commodity prices went through the roof. The province of fish and cut bait was reborn as the proverbial one of milk and honey. Public coffers were full to brimming with billions of bucks. Incomes in St. John’s soared, as did house prices. Road works and other infrastructure projects dotted the craggy landscape.

Then, a funny thing happened on the way to the Big Rock Candy Mountain: The bottom fell out. A reckoning was nigh. In fact, it’s right about now.

According to a recent report by the Fraser Institute, a private think tank based in the West, writing about the newly benighted East, “Newfoundland and Labrador’s provincial finances are in a dire state. The government’s latest projections have the province facing a nearly $2 billion operating deficit, equivalent to almost a third of its total annual revenue. After adjusting for the size of its economy and population, Newfoundland and Labrador will have by the far the largest deficit among the provinces in 2015/16.”

Indeed, says the Institute, “It gets worse. The government currently projects deficits averaging approximately $2 billion from now until 2020/21. Meanwhile, provincial net debt (a measure that adjusts for financial assets) is set to almost triple in nominal terms from the recent low of $7.8 billion in 2011/12 to $22.9 billion in 2020/21.”

What’s the cause? It’s simple: Overspending based on rosy projections about a singularly fickle industry.

Says Fraser’s researchers: “A popular narrative holds that falling revenues are to blame, particularly as the energy sector and consequent government revenues have been hit by depressed commodity prices. And there is no doubt revenues have taken a big hit in recent years, declining by 31 per cent since 2011/2012 and placing considerable pressure on government finances.      “Nevertheless, the view that declining revenues alone are responsible for the province’s fiscal problems ignores the important role that provincial spending growth has played in creating the crisis.

“Government spending in Newfoundland and Labrador took off after 2004/05, coinciding with the commodity boom when energy prices and development began to rise. Subsequently, the provincial government continued to aggressively increase spending as revenues quickly poured into the provincial coffers. In fact, program spending is now almost 80 per cent higher in nominal terms than in 2004/05. From 2005/06 to 2011/12, the government increased program spending by a whopping 8.4 per cent each year on average – much faster than the rate needed to keep pace with increasing overall.”

All of which may only prove that governments, when faced with a windfall of found money, are loath to replenish their “rainy day” funds in favour of spending like sailors on shore leave.

In any case, by comparison, New Brunswick’s rather ill fiscal condition looks almost robust. After all, with a population about the size of Newfoundland and Labrador’s, our $400-million deficit and $13-billion debt seems almost manageable.

Still, it only seems this way. Unless we begin to diversify and innovate, own resource-based, commodity-dependent economy will surely find itself in the circumstances those of our brethren to the northeast now face:

Between a rock and a hard place.

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It’s all Greek to us

We could sell the snow. There's plenty of that

We could sell the snow. There’s plenty of that

New Brunswick, fiscally considered, is not Greece. But are we getting there?

Canada’s second-smallest province, by population, endures a long-term- debt-to-GDP ratio of 32 per cent. That means dunning, theoretically, every man, woman and child in this province roughly $15,000 a year (more than $35,000 if you consider the federal shortfall).

Greece, in contrast, is Europe’s 14th-most populous country. Its debt now stands at an astounding 180 per cent of annual economic production.

For a while, this nation was relatively robust: Its tourism trade was second to none in the world; its agricultural and resources sectors were among the strongest in the Mediterranean region. Now, it is all but bankrupt.

Last week, the country’s government ordered the banks to shut down (to prevent a run on deposits); this week, the national treasury defaulted on a critical loan repayment to the International Monetary Fund; and just yesterday all heck broke loose on international stock markets as fund managers and moneyed investors around the world sent exchange prices tumbling by triple digits – all because a middling nation with unsustainable leverage couldn’t pay its bills.

The factors that contributed to the “Greek Crisis” (now in its fourth year) are complex. They include socio-economic mismatches involved with merging trade agreements and currency standards into the European Union, and political and fiscal traditions within Greece, itself, which have not tolerated high capital streams from public sources of revenue. (English translation: Though the country maintains comparatively high marginal and progressive rates, Greeks, themselves, are expert tax avoiders).

According to an article in The Economist two months ago, “Greece emerged from recession in early 2014, but its escape from contraction was short-lived. Figures released on February 13th showed the Greek economy still growing year on year, but shrinking in the final three months of 2014. Since 2008, the Greek economy has shrunk by about a quarter. Although not quite as deep a downturn as America’s Depression, Greece’s recession was more prolonged and is likely to take more time fully to recover from. Recent downturns in the euro area seem like minor hiccups in comparison.”

In fact, Greece’s pre fiscal-crisis conditions appear troublingly familiar to residents of New Brunswick, struggling to reconcile their own ambitions with backward circumstances. In Greece, The Economist states, “Even before the crisis struck, (the country) was a laggard. In 2008 only a third of households had the Internet, the lowest share in Europe. Levels of youth unemployment and government debt were already among the continent’s highest. Since then, the gap between Greece and the rest of the euro zone has grown. Unemployment has more than tripled to 26 per cent, and three-quarters of the jobless have been out of work for 12 months or more. Over a third of Greeks are considered to be at risk of poverty.”

The degree to which a country, region or province is a victim of forces beyond its control is a subject for bitter debate. But people who buy the proposition that individual initiative makes no difference to the health of the polity are very often the same ones who expect unchanging standards of public services long after the state has run out of money.

That is certainly the case in Greece, where the leftish government has resisted all efforts by its international lenders to impose austerity measures, while keeping its outstretched hands, palms up.

New Brunswick’s annual deficit and debt are absurdly high for a province of its size.

The question remains: How long can we afford to flirt with our own Greek problem?

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