What caused the deficit?

in A Measured Opinion by

Our province is in crisis. The provincial deficit has swollen to an enormous $2 billion per year and, without drastic action, is forecast to remain that high for years.

How did it get so bad?

The blame rests squarely on the shoulders of former Premier Danny Williams.

During Williams’ second term, from 2007 to 2010, public spending surged more than 30 per cent, an increase of almost $2 billion per year.

Government of NL Program Spending
(Source: Auditor General financial statements)

Meanwhile, Williams slashed taxes. Between 2006 and 2010, personal income tax rates were cut by more than a quarter. By 2013, the Department of Finance estimated that PC tax cuts were costing $744 million per year in lost revenue.

This orgy of overspending and tax cuts didn’t immediately lead to deficits because the Atlantic Accord kept equalization payments coming from Ottawa even though we became a “have province”. But when the Atlantic Accord expired in 2012, those equalization payments disappeared and the provincial government faced huge deficits, even when oil was still over $100 per barrel. Now that oil prices have plunged, we find ourselves in a crisis.

What didn’t cause the deficit

Some people blame the deficit on public works (like roads and buildings) or Muskrat Falls. But these things have played only a minor role.

Infrastructure spending: The PC Party talks a lot about how they needed to repair crumbling infrastructure that was neglected under the previous Liberal government. Paul Davis pleaded in a recent interview: “We had to get the province fixed before we started a savings account.”

It is true that a lot of money was spent on infrastructure; capital spending is roughly double what it was before the boom, an increase equal to about $300 million per year. But the impact on the deficit is much less than that because the Auditor General doesn’t count capital spending in the year it is spent. Instead, the spending is spread out over the lifetime of the assets (a standard accounting practice called amortization). By my calculations, the boom in infrastructure spending has added less than 10 percent to the deficit, including interest on loans. Repairing roads and buildings is not what got us into this mess.

Muskrat Falls: Former Premier Roger Grimes claims that the deficit was caused by Nalcor and the Muskrat Falls project. I wish this were true, but it isn’t. Though the government has transferred billions of dollars to Nalcor, this is considered an “equity investment” and does not count towards the deficit. We are supposed to pay for Muskrat Falls through our power bills, not through the government treasury.

It is true that the province is borrowing money to make that investment, and the interest on those loans will add about $150 million to the deficit. But Nalcor is supposed to pay dividends of $400 million per year back to the government once the project is complete, which would more than make up for this interest. I’m skeptical those dividends will ever get paid, but if they aren’t, then it will be in addition to the current $2 billion deficit.

Former Newfoundland and Labrador Premier Danny Williams cut taxes ______ Flickr / US Mission Canada
Former N.L. Premier Danny Williams, in 2008. US Mission Canada.

Danny’s legacy

In short, Williams wrecked the budget with tax cuts and overspending, and then left others to clean up his mess.

Kathy Dunderdale got spending growth under control and made some cuts in the 2013 budget, but not nearly enough to put us back on track.

Paul Davis raised taxes and established an attrition plan to shrink the public service, but his most important measure—the HST hike—was cancelled when the Liberals took over.

The new Liberal government has not released a plan yet, but brutal austerity is certainly coming. There will be strikes, there will be layoffs, schools will close, services will be denied, taxes and fees will go up, and people will get very angry.

This is Danny Williams’ legacy.

Read Tom Baird’s follow-up to this column, “How to fix the deficit”.

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