April 05, 2017

The Potential Cost Of The April 2017 Budget

I am going to make a prediction about the cost to the public of Newfoundland and Labrador of tomorrow’s budget, which you won’t find in the budget papers. It’s likely to cost us $100 million a year more in debt financing costs within 5 years – if we can find someone to lend to us.

The CBC’s financial expert and budget commentator, Larry Short, this morning expressed surprise at the extent of the spending problem. Larry recently got under the hood with the financial numbers to do his budget commentary, and he became alarmed by how desperate our situation is.

Larry likened the situation to a ship going down, and the passengers rowing hard to get to shore in lifeboats. Worry later, he advised, about who to hang for the shipwreck!

I’m not surprised at how desperate the situation is, because I’ve been looking at the numbers for several months. But I am alarmed at the scope of the problem and the lack of outside-the-box thinking about ways out of it. As Larry points out, equalization payments from Ottawa are not the answer, because we don’t qualify. We don’t qualify because we have high per capita revenues!

What did surprise me, as I researched the fiscal crisis, is that something similar happened to Saskatchewan in the early 90s. A significant irony of the situation is that the debt and deficit crisis in Saskatchewan was caused by years of free spending by the neoconservative government of Grant Devine, and it was the newly installed NDP government of Roy Romonow that was forced to tackle their fiscal crisis and wrestle it to the ground. A fiscal crisis created by conservatives had to be resolved by socialists, using conservative tools of fiscal discipline and austerity!

Spoiler alert to NDP sympathizers in NL: you can’t find the money to resolve the deficit by taxing the rich, or the NDP in social democratic Saskatchewan would have tried it. There aren’t enough rich people!

Janice MacKinnon was the minister of finance at the storm centre of Saskatchewan’s struggle and recovery and she wrote a book about it called Minding the Public Purse. This book should be read by all members of the NL legislature.

I attach five key pages from Janice McKinnan’s book. Some take home points:

a)    The consequence of a BBB rating for Saskatchewan was to reduce the number of institutions willing to lend money from 150 to 25;

b)    The technique of using an independent financial expert to frame the debate and the hard choices for the public was useful (but also had the unintended consequence of raising concern among the rating agencies). A version of this technique might consist of having an all-party committee of the legislature commission a report from an independent expert;

c)     Political will and the ability of resolute leadership to instill confidence in both the public and the financial community, was of critical importance in resolving the crisis.

The loss of provincial autonomy and independence that Janice McKinnon describes is right around the corner waiting for us. I will go out on a limb and predict that the budget delivered on April 6, 2017 will result in a credit rating downgrade. We are already on a watch list, or negative outlook, with the two biggest rating agencies. I have to get a little bit technical to explain what to expect, but bear with me.

The first downgrade would likely be to BBB+. This would make our interest rate on borrowing more expensive, by what is called 20-25 basis points, or ¼ of 1 percent.

The next downgrade after that would be to BBB. This would raise the cost of borrowing by 50 basis points, or ½ of 1 percent – if we can get the money.

The debt load which NL now carries is around $15 billion, and most of that will have to be rolled over, or refinanced, within the next 5-6 years.

The cost to the people of NL of the first downgrade to BBB+ would be $40 million per year by 2022/23, if we accept the government forecast that debt will rise to $20 billion by 2022/23.

The cost to us of a second downgrade to BBB would be an increase of $100 million per year. You won’t see this discussed in the budget papers.

These numbers are daunting enough, assuming we can somehow pay the debt service charges. The more important consequence is that many institutions will be prevented from lending to us. As noted above, the number of institutions willing to lend to Saskatchewan dropped from 150 to 25. We are then in uncharted waters, and predictions as to how the situation will evolve become dodgy.

What we can say for sure is that the result will be a loss of our independence, autonomy and sovereignty as a province to international finance and the federal government.

CBC budget commentator Larry Short could not see any way through this dire mess other than cuts. And Larry was not even addressing the impact of a doubling of electricity rates on the Island when Muskrat Falls power comes online in the middle of 2020! This will amount to what I call a perfect storm – a rare event where a combination of circumstances aggravates a situation drastically.

I have been on the Connect with Crosbie tour assessing my prospects for a bid for leader of the PC Party of Newfoundland and Labrador. When the party decides, probably by June, the timing of the leadership selection process, I will decide whether to become an official candidate.

In the meantime, I have been talking to party members personally and by telephone, and exploring the depths of our spending problem. I have also been focusing on win-win solutions. I will be discussing these solutions as time goes on.

Thank you to Janice McKinnon for her personal advice, and to the financial experts who briefed me on the above numbers.