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Enabling dependency

By: | April 20, 2017

How can we explain the continued government inaction in the face of the worst recession since the cod moratorium?

Robert Sweeny
Politics by Numbers: graphically raising issues

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"With recoverable reserves estimated at over 700 million barrels, Hebron is poised to join the billion barrel club and take a prominent place in our province’s oil and gas history along with the Hibernia, Terra Nova and White Rose fields," Premier Dwight Ball said at the Hebron oil platform tow-out event at the Bull Arm Site in Trinity Bay on April 18, 2017. Photo: Department of Natural Resources N.L. / Twitter.

Every year for the past decade, the provincial government locks me up. Not in Her Majesty’s Penitentiary, nor in the lock-up in the basement of the St John’s courthouse, but in the Comptroller General’s office in Confederation Building. There I join a dozen other people in the NDP lock-up, where custodians from the Finance Department confiscate our phones, register our computers and monitor any visit to the washroom.

The lock-up immediately precedes the provincial budget speech. We inmates have three to four hours to make sense of close to 500 pages of documentation: the speech itself, an overview of the economy, a packet of press releases accompanied by the now mandatory graphics package and detailed spending estimates. It is a daunting task to grasp a whole series of complex issues and then formulate a meaningful and coherent response in such a short time. It is not a process that normally results in new understandings. This time, for me, it was different.

Over the past three years, ever since the Davis budget of 2015 first forecast dire economic times ahead, our task has become even more difficult. The nature of this difficulty is simple: there is a profound disconnect between what the economic indicators forecast and what the government plans to do.

The government is now predicting all of the key economic indicators to worsen markedly from the situation prevailing when they took office, represented in this graph by indices of one for 2015.

Ball Bennett Current Plan

If Ball and Bennett are successful — that is, if all goes according to plan — then by 2021 retail sales will be decimated, household disposable income cut by an eighth, employment by a sixth, final domestic demand by a quarter, housing starts by 43 percent and capital investments by more than half.

With the exception of capital investments, almost none of the $8.25 billion that the government will spend in the coming year addresses any of these dire predictions. Capital expenditures by the provincial government include $710 million (the equivalent of 91 percent of the projected provincial deficit) on Muskrat Falls and $200 million on roads.

It is as if the government simply does not know what to do to help the people so badly affected by not only the economic downturn but also by their own panic budget of last year.

In the face of the worst situation since the cod moratorium, government’s only response is to hold the line on spending while waiting for oil royalties to once more begin to flow, some time in the mid-2020s.

To explain this political choice, critical voices in our province have come to increasingly rely on the idea that Newfoundland and Labrador has become a petro-state, a perspective that views our dependency on oil-derived revenues as the systemic weakness impeding appropriate government action. If this is the case, then the policy alternative is clear: To escape the trap of dependency, we need to diversify our economy along the lines proposed by Common Front NL.

What if we recognize [government’s] current inaction as being a choice?

The conundrum posed by this analysis is simple. Why have successive governments not done this? Is it really because, as I suggested to The Independent on budget day, that they lack imagination?

Since then I have been giving a good deal of thought to an idea that came to me during the lock-up almost as a revelation. It is a scary idea, for if correct, then the nature of the problem we face is much greater than we imagine.

What if, instead of conceiving a petro-state as a relationship of dependency where the government has little choice, we restored agency to the government’s actions? Instead of conceiving the government as being so dependent on oil revenues that it has few, if any, options, what if we recognize its current inaction as being a choice? It is choosing to enable expansion of the oil industry to the deliberate exclusion of other strategies.

Enabling directly relates to dependency, because enablers benefit from the dependency of others. Thinking in terms of enabling has helped us better understand the dynamics of sexual abuse, drug addiction, bullying, misogyny and a whole host of other social- and gender-based problems. It is not, however, how we tend to think of either democratically elected governments or advanced capitalist economies.

In support of this radically revisionist understanding, I offer two pieces of evidence. I know they are not in and of themselves sufficient proof of concept, but I hope they are enough to initiate a very necessary conversation. I start with a highly revealing graphic prepared by the government as part of the package that accompanied the budget.

Oil Production And Royalties

This is a cleverly deceptive graphic. It builds on the popular misconception that royalties are tied to production to allay fears that there might be any imbalance between the two. In this representation, production figures and the royalties they generate appear to move in tandem.

In fact, the royalties we receive each year are not at all related to how much oil is produced that year. This disjuncture is because no serious royalties are paid until the transnational consortiums that control each oil field receive back all the funds they have invested, plus interest. Only then are any substantive royalties paid into provincial coffers. This is known, tellingly, as “reaching payout” — and it takes years.

The resulting imbalance can be seen by comparing Hibernia in dark blue and Hebron in green. Hibernia reached payout in the mid-2000s and so, despite declining production, will continue to provide the bulk of the province’s royalties for the foreseeable future.

The bar chart shows an increase in royalties from Hibernia despite considerably reduced production by 2019. This is because royalty payments are tied to the price of a barrel of oil and the government is banking on a 40 percent increase in oil prices. Its current forecast for the price of a barrel of oil would see $440 million in additional annual revenues by 2022.

By contrast with Hibernia, Hebron will be producing most of the province’s oil by 2020, but will not be contributing anything substantial to our coffers until the mid-to-late 2020s. This is true no matter what the cost of a barrel of oil might be.

This royalty regime allows transnational corporations in oil and mining to make exceptional rates of profits. In most advanced capitalist economies net corporate profits usually amount to a third of the total paid in wages and salaries.

In Canada, as is visible on the graph below, this has been quite a stable relationship, with wages around 45 percent of GDP, while net corporate profits fluctuated around 15 percent.

Thanks to our royalty regime, however, through the 2000s corporate net profits in Newfoundland and Labrador tripled the share of GDP and in 2007 and 2008 rose to almost double the share of all wages and salaries in the province.

Stability

The scale of the profits are truly mind-boggling. Treating the boom years between 2002 and 2014 as whole, net corporate profits actually exceeded all wages and salaries paid out in the province by $6 billion during these 13 years.

The largest share of these excessive profits were in extractive industries that permanently deplete our natural resources, meaning profits went quite disproportionately to corporations head-quartered in other countries. During the boom, our province averaged a mere 17 cents in royalties for every dollar of net profits that went largely elsewhere.

There is a further complication to consider. While it is our oil, we don’t know how much there is in any of the fields. The data used to estimate oil reserves are the proprietary information of the very transnational corporations which so profit from their exploitation. Each of the oil fields has its own royalty agreement, but the structure of payments in all cases ensure that if there is less oil than anticipated, then it will be the belated royalties that will suffer, rather than any up-front corporate profits. 

Why hasn’t this exceptionally weak royalty regime and its inherent risks been the subject of public debate? After all, for decades we made the Churchill Falls agreement a political issue, but during the boom that deal involved a transfer of wealth to Hydro Quebec of less than a sixth of the profits that accrued to the transnationals in oil and mining. A partial answer to this question is offered by the findings of a recent analysis of provincial fiscal policy, which shows how profoundly the boom transformed our economy.

In 2005, the first year oil royalties approached half a billion dollars, the overwhelming majority of people (95%) filing a tax return were in the bottom two tax brackets. They earned four-fifths of all taxable income that year. Only one in 20 people were in the top tax bracket, and they took home a fifth (21%) of taxable income.

By 2013, as the boom came to an end, those in the top tax bracket had swelled to a sixth (17%), and they took home almost half (47%) of the taxable income in the province, while pocketing almost two-thirds (64%) of the individual tax credits. The remaining half (53%) of the income and a little over a third (36%) of the tax credits were shared by the four out of five people (83%) in the lower tax brackets.

This seismic shift in the political economy of taxation means that there is now a significant and influential minority with a vested interest in both inequality and maintaining the current fiscal regime.

What do these two disparate images tell us? Is the deliberately misleading suggestion of a balance between oil production and royalties related to this radically altered political economy? Taken together, can they help us understand either the provincial government’s refusal to diversify the economy, or its blind indifference to the damage inflicted by its policies?

Over the past 20 years, a complex new political economy has been created in Newfoundland, one that Labrador has known in differing forms for centuries. Central to its success has been a royalty regime that ensures extraordinary profits for transnationals while allowing a minority within the province to prosper as never before.

Finance Minister Cathy Bennett and Premier Dwight Ball shake hands after Bennett delivered the Liberals 2017 budget speech April 6. During the speech Bennett said the government is "optimistic about the future of our offshore oil industry," and that they "believe that Hebron will be one of a number of future developments in our offshore." Further, she said the government is working to "position our province as a preferred location for development." Photo by Brian Carey.

During the Liberals’ 2017 budget speech on April 6 Finance Minister Cathy Bennett said the government is “optimistic about the future of our offshore oil industry,” and that they “believe that Hebron will be one of a number of future developments in our offshore.” Further, Bennett said, the government is working to “position our province as a preferred location for development.” Photo by Brian Carey.

This is, to be sure, an unequal partnership, but it is one that benefits both parties.

The wealth accumulated within our province during the boom has been more than enough to change our politics and our culture. Despite the evident damage being done to people and communities, the plan of those in control of government is to maintain this new political economy until Hebron reaches pay-out and brings a return to the distorting, local profit-taking of boom-time conditions.

In the mid-19th century, amidst the first boom and bust cycles of capitalism, a leading politician of Upper Canada was challenged to defend his actions. Sir Allan McNab responded unapologetically: “Railways are my politics.” Few politicians would respond so honestly now.

Beyond that marked difference, however, there is a fundamental similarity.

Just as that first liberal revolution generated qualitatively new forms of inequality through an unprecedented and highly gendered exploitation of nature, so too does the present neoliberal agenda.

The difference is that we are all well aware of global warming, and so we know the inescapable costs of allowing our government to enable the continued destruction of the planet by transnational corporations.

Sadly, we are also now learning all too well the cost to our communities of our failure to act on that knowledge.

Robert Sweeny lives in the Georgestown neighbourhood of St John’s with Elizabeth-Anne Malischewski. An historian of capitalism, his study ‘Why did we choose to industrialize?’ won the Governor General’s award for scholarly research in 2016.

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