A Matter of Dollars and Sense

In recent weeks I have watched with trepidation and interest as oil prices have plummeted to historic lows. They may not have bottomed-out yet, but the ongoing social, political and economic tensions in the Middle East and Russia, for example, are definitely contributing to a continued downward trend. A trend, I might add, that is predicted to continue into 2016

The Newfoundland & Labrador government bases approximately 30 percent of its budget on fossil fuel revenues. As Jeffrey Simpson of the Globe and Mail recently noted when discussing Alberta, “local governments just keep basing budgets on volatile revenues that have a tendency to rise and fall”… without any control.

He continued by saying that there are many who believe that governments should be cutting waste – and that the real issue is a spending issue and not a revenue one. In other words, governments, like a family, should be spending within its means and have the foresight to plan for a rainy day…especially when approximately one-third of its income is precariously unpredictable.

So here we are – governments scrambling once again to address a significant shortfall in revenue. A shortfall that could easily be manageable if they adopted a different way of doing business.

In contrast to us, in oil-rich Norway every man woman and child became a theoretical millionaire at the beginning of 2014. The country’s oil fund – which collects taxes from oil profits and invests the money, mostly in stocks – exceeded $905 billion in 2014 and is expected to reach $1 trillion in 2015. Norway isn’t the only country in this enviable position. The United Arab Emirates’ fund is valued in excess of US $800 billion, Kuwait has about US $400 billion, and Russia has accumulated approximately US $180 billion.

This is all happening in Norway and other places at a time when our province has a net debt of approximately $11 billion… a debt that will probably grow in excess of $12 billion before the current crunch is over.

What is wrong with this picture? How can a country like Norway manage to guarantee its citizens’ prosperity for the future while we are drowning in debt? Should our governments set up some sort of sovereign wealth fund like the one in Norway? Should a percentage of all revenues from natural resources be legislated into a trust fund whereby it is protected from going into general revenue and being spent before it hits the bank?

The provincial government blames its deficit on the falling oil prices. Hibernia crude is selling for considerably less than it once did. But is this a good excuse? Norway has also had to deal with low oil prices over the years but has always found the “political” will to feed its rainy day fund rather than spend it on “more” infrastructure that will ultimately cost more to maintain in the future then to build in the first place.

As citizens, we have become greedy and that greed has translated into pressure on politicians, who, for better or for worse, need our support to keep their jobs. With this in mind, they feel, and have always felt, compelled to bow to a drunken, blow-out barn dance today rather than a string of small kitchen parties down the road. It is mostly about optics...and votes.

Had we set up a proper sovereign wealth fund years ago when the oil started flowing – or even draw higher royalties on current production – we could have paid off much of the debt by now and used that money, plus savings that we currently pay to finance our debt, to avoid future deficits. We would not be in a situation where knee-jerk decisions have to be made today to make ends meet tomorrow.

Oh, but we have solutions to the current crisis! Well…we do if we listen to the armchair pundits, the open line shows , and those with all the answers when being interviewed by the media. Cut the size of government, they say - reduce the size of the House of Assembly, reduce the number of cabinet members, lay-off civil servants, amalgamate government agencies... Oh, but when you are doing all this ‘necessary’ cutting, don’t touch health care or education or social services or transportation, or transfers to municipalities…and ‘don’t’ raise taxes.

Where will oil prices be in two years? The point is no one knows, according to Jeffrey Simpson, so why depend so heavily on the unknowable? How can any responsible government take the risk ‘again’ to budget on the volatile price of a commodity over which it has absolutely no control but upon which it has consistently bet so heavily, and sometimes so wrongly?

Winston Churchill once said that we should never let a good crisis go to waste. If that is the case then the current government, or the one that succeeds it, has an opportunity to learn from the current crisis and make sound political and economic decisions for the future.

Where should we begin? A great place to start might be to build all future budgets on $50/barrel oil and invest any excess oil revenues into a sovereign wealth fund... while also paying down on the provincial debt – that is costing us 12% ($800M+/-) of total revenue to finance. Build it into the current legislation - make it law, so that future politicians are never again given a blank cheque to spend like drunken sailors. 

It is simple economics – working with less dollars and more sense.