Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Thursday, November 24, 2011

No Rock is an Island

Sometimes one could be forgiven for feeling that Newfoundland and Labrador is an isolated economic miracle that defies the normal economic rules of gravity. To listen to Ms Dunderdale or Mr Marshall is to be swept up in a feel-good-fest that only the crankiest of naysayers would dare challenge. An island economic boom that need not be burdened by its own structural weaknesses or outside turbulence.

A simple gaze to the East should shatter these flights of fantasy. The European Union is at a tipping point. A real tipping point that has the potential to dramatically shift the proverbial financial axis of the world in one big bang. Not unlike the Canadian federation, the European community is grappling with not so much a financial crisis as an attitude problem. Sure there is a financial crisis, but the bigger problem for the Unions future is the attitudes that created the crisis. Germany holds steadfast in its position that the spend thrift states must release their sovereign right to budget. It maintains that only a supra-national mechanism of control, which can veto any nation in the Unions overspending, can maintain the credibility of the Euro.

Germany argues that simply turning to the European Central Bank for bail out after bail out just forestalls an inevitable collapse. That the real demon is over spending by states that quite frankly can not back up their relatively lavish lifestyles anymore. The insinuation, on a grand scale, is that economically prudent and disciplined states would be left to give their hard earned returns to those countries that would not sacrifice - even for their own economic survival. No doubt Germany is 100 % correct.

And so we have the Canadian federation. Burdened as is Europe with those members who show financial prudence and discipline and those that do not. On the one end of the spectrum you have Quebec, and to many degrees Atlantic Canada. In Quebec's case the provincial government deliberately suppresses the value of its hydro sales to show a loss. It expends on social programs, such as its $7 a day child care program as if it were a constitutional right. It has the highest per capita debt levels in the country. It has a rapidly aging population that can never pay back the debt it has now, let alone any further accumulated debt. It plays the game of spend so as to remain a "have not province". In other words, Quebec deliberately spends far more than it ever makes so that it not only does not contribute in a net sense to the federation, but in fact is a constant financial recipient of "bail out funds".

Where do those bail out funds come from? They come from the equalization formula that aims to ensure services across the country are relatively equal. The problem is the provinces paying into the fund, and receiving nothing back, are the well disciplined ones. Alberta and Saskatchewan are tackling their own balance sheets in a fiscally prudent way. They are both either debt free or on their way to being so. They have made choices, sometimes tough ones, to ensure their province is on the right track. They do not have massively reduced electrical rates for their citizens, or fanciful daycare programs. They are in fact subsidizing the irresponsible provinces unsustainable lifestyles in many cases.

Unlike Germany, they have not been able to put the brakes on and demand financial sense from their fellow confederates. Well, maybe they will in 2014. The equalization program comes up for review in 2014. Already we have heard rumblings from Ontario that they want more. The positioning is, and has been, going on for some time. The big question is will the financially responsible members in Canada, say like Germany in Europe, be able to alter this devastatingly unfair program? Will they be able to insist that member provinces pass legislation banning deficits - like Germany is trying to do in Europe? Will the federal government, with a distinctly western outlook, take on the role of requiring fiscal responsibility of the provinces?

Seems to me the time is right. We should not wait until the federation gets torn apart by selfish and foolish spending. We should be looking at Europe and seeing the inequality and lack of justice that an undisciplined financial arrangement can create. Currently in Newfoundland we are a have province. Our government fought tooth and nail to be exempted from paying its share in the equalization scheme. That exemption runs out in 2011. Next year there are no offset payments to compensate for oil revenues going to the equalization fund. Next year we really become a have province. The joy of funding Quebec's $7 a day daycare becomes ours. Will we now be joining Alberta and Saskatchewan in demanding the other provinces become fiscally responsible?  Or will we try and take Quebec's tact and spend to the point we revert to have not status so we don't have to pay? History suggests we will spend.

It's at moments like these in history that we should be looking at others and seeing ourselves in them. Rather than increasing our civil service by 25% in four years we should be seeking massive efficiencies. Rather than trying to drive our economy by state driven mega projects like Muskrat Falls we should be directing all available dollars to the debt. If we just looked around the world today -  whether it be the US, Europe, or even the rest of Canada - the answer is so clear. Fiscal discipline. Fiscal discipline. We may be the Rock, but in the financial world there are no Islands.

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