Slamming on the fiscal brakes

John
John Crosbie
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Last in a two-part series

As a politician, I often made the point that people should realize there can be no social safety net unless first we have a fiscal safety net.

I still believe this principle applies, although most politicians believe, as did famed U.S. football coach Vincent Lombardi, that “Winning isn’t everything, it’s the only thing.”

This is not just an issue here, but in every province across Canada.

An excellent article in the March 4, 2013 Maclean’s magazine, entitled “The deadbeat bunch,” addressed the failure to rein in spending and make tough budget choices, saying it put all provinces on course for a European-style debt crisis.

The article pointed out that even Alberta had a projected

$6-billion deficit, and noted that, “Even as Canada is held up as a model of fiscal responsibility around the world for our relatively low federal debt, our provinces are swimming in red ink.”

According to Maclean’s, “Pro­vincial governments are hurtling toward financial disaster at breakneck speed. Couple that with public-sector compensation demands and a political refusal to make tough spending decisions, and provincial budgets could quickly spiral into a crisis that engulfs Ottawa and risks the country’s reputation as a fiscal stalwart — and, ultimately, destabilizes the economy.”

Last fall, the Macdonald-Laurier Institute found that Ontario’s debt was worse than that of California, a state which once was forced to issue IOUs instead of income tax refunds because of its troubled finances.

Maclean’s points out that combined federal and provincial government spending has exceeded budget targets by $82 billion over the past decade, as calculated by a C.D. Howe Institute report, with the provinces accounting for the majority of this overrun.

It is certainly a problem we have had in Newfoundland, as well.

This article compares Canada’s provinces with American states and concludes we are starting to look like poor cousins.

Any reasonable person who read the Maclean’s article and heard economist Wade Locke’s advice to our provincial government could understand why there had to be reductions and restrictions in the 2013 budget. While mistakes might have been made in the process, it was certainly necessary for our government to change course.

Locke is often instructive. In an address he gave on July 15, 2008 at Rothesay, N.B., at a gathering called Energy Dialogue IV, he talked about the oil and gas discoveries off our east coast, mainly in the Jeanne d’Arc Basin, and the producing wells at Hibernia, Hebron and White Rose.

He pointed out that we always have to remember — although finance ministers sometimes forget — that crude oil prices can change rapidly, and so we have often overestimated what those prices might be. The growth in our province certainly started when production began at Hibernia in 1997.

The Bay du Nord prospect in the Flemish Pass, with its possible reservoir of 300 million to 600 million barrels of recoverable light oil, and other finds in the Flemish Pass and the Orphan Basin — with exploration wells underway at a huge cost — is very encouraging. We also have the Labrador Shelf, the Sydney Basin and our west coast, as well. It is important now for the government to encourage research and development activity.

The federal government, at present, receives 24.4 per cent of the revenues from these discoveries; the private equity holders who made the discoveries and the investments take 37.8 per cent; while our province receives 37.8 per cent of the revenues.

There are huge benefits for all stakeholders and there must be, certainly, or the private enterprise risk-takers will not be willing to take the risks they must to discover what lies beneath our waters and under the soil deep down in the Atlantic Ocean.

The Maclean’s article reminds us that the “Provinces are swimming in red ink.”

The fact that there is an estimated provincial debt of $589 billion, together with a $660-billion federal debt, means that, together, Canada’s debt-to-gross domestic product ratio is around 86 per cent. Ninety per cent is calculated as a level which would harm economic growth, and to all this we have to add pension liabilities and debts of Crown corporations, which puts our debt up to 104 per cent of GDP — a very high percentage.

That’s why Maclean’s concludes that our provincial governments “are hurtling towards financial disaster,” which we must reverse or slow down.

We also have to recognize that just to pay for increasing health costs, which the provinces are constitutionally responsible for — and which, for example, in Ontario, comprises half of provincial spending — is a major problem for our governments to overcome.

We should be sympathetic about the actions our provincial government had to take in its last budget, since the need to slow down government spending is evident here, as it is in all of the provinces, even mighty Ontario and Alberta.

I believe our government was wise to observe Locke’s advice and adopt a credible debt-reduction strategy. If it’s done carefully and not too dramatically, as Locke advised, it will be a step forward towards our future growth and well-being.

John Crosbie welcomes your feedback

by email at telegram@thetelegram.com.

Organizations: Hibernia, Macdonald-Laurier Institute, C.D. Howe Institute

Geographic location: California, Canada, Alberta Ontario U.S. Ottawa Newfoundland Rothesay Hebron White Rose Atlantic Ocean

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