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Russell Wangersky: We might need a financial intervention

The Confederation Building in St. John's, Newfoundland. — file
Newfoundland and Labrador spends far more than it takes in. — Telegram file photo

There was a bit of a fuss last week in political and media circles about a poll that suggested Newfoundlanders and Labradorians feel there’s a risk that this province’s finances are so bad that we could fall into bankruptcy.

Russell Wangersky
Russell Wangersky

 

The concerns about the poll fell into two camps: one had issues with the methodology of the poll question and language, while the other was more concerned with whether the province could actually go bankrupt.

Practically speaking, it’s unlikely.

As long as we keep making our payments, we’ll be able to borrow more money, even if we shouldn’t.

Our provincial indebtedness, after all, is part of the Canadian federation; if we didn’t have that implicit backing, it would be much more difficult — and much more expensive — for us to borrow money. (Because if we were all on our own, our credit would not be as good.)

But we are in difficult times.

Even the province’s finance minister, Tom Osborne, has in recent weeks said that the provincial government came within days of not being able to make its payroll in early 2016 — though he cushioned that by saying the government was able to solve the problem by an immediate borrowing on the financial markets.

So … we paid our rent with a payday loan.

But that’s not the end of the story.

What could be coming is what’s unfolding in New Brunswick right now: one of rating agencies that helps decide for the lending market how risky New Brunswick’s bonds are — and what kind of risk premium the province would have to pay in the form of increased interest on new debt — went so far as to say they were losing confidence in that province’s fiscal state.

What the rating agency DBRS actually said was that, even before they complete a full evaluation of that province’s recent budget, the province’s multi-year plan “lacks credibility.”

The problem isn’t so much whether we go bankrupt or not, it’s more about how much control of our own governance we’d lose in order to satisfy lenders that we could pay the money back.

Another part of the DRBS concerns for New Brunswick could be written about this province: “Demography is a key challenge, as the population continues to age, and population growth is expected to remain slow, limiting labour force growth and potential output. In addition, the investment climate remains weak, with limited prospects for a notable pickup in public or private investment.”

Election spending, the agency said, is skewing plans for New Brunswick to return to balance. I bet that will happen here, too.

The problem isn’t so much whether we go bankrupt or not, it’s more about how much control of our own governance we’d lose in order to satisfy lenders that we could pay the money back. There’s a point at which bond rating agencies get uncomfortable with what they are seeing, and they are not long in coming out publicly to say so. Their displeasure can come with us having to pay interest rates that are higher than those on other, less-risky government bonds.

To prevent that, our government could become successively more hamstrung in its ability to spend money, simply because it would have to make — and live up to — commitments to our lenders to address our liquidity issues.

If we were to need help in the form of some kind of bailout from Ottawa, we’d see the same sort of thing. The federal government would be unlikely to hand over money without strings attached, and the biggest strings would almost certainly be around spending. Our province isn’t in a fiscal jam because we don’t take in revenues — it’s in a mess because we spend more than we take in, and, while we’re thinking about that, more, per capita, than other provinces do for similar services.

The issue isn’t really about bankruptcy: it’s about what strictures any new financial overlords would put in place to ensure that we didn’t continue to live beyond our means.

You could think of it as enforced credit counselling. And it would be painful.

Russell Wangersky can be reached at russell.wangersky@thetelegram.com — Twitter: @wangersky.

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