The Twilight Zone

Remember that old show, The Twilight Zone? A place where fantasy imposed its self on reality? You know, "do not adjust your set". Well political events in Newfoundland and Labrador have been playing out that way for some time now, but no better an example can be had than this week's events.

Consider the news given to the province that the end of year fiscal deficit is estimated to be $725 million. That is not the accumilated deficit. That is a one year deficit. Nova Scotia coincidentally announced their deficit rose some $60 million to around $250 million. That is an accumulated deficit. It keeps growing. Then consider the provincial government is estimating next year's operational deficit to be $1 billion. Add the two of them together, and by the end of fiscal 2013 Newfoundland and Labrador will have an accumulated deficit of $1.725 billion, or about 28% of its annual revenue.

To give some context to a deficit that large consider the comparables. The federal government has a deficit of about $25 billion. If its deficit was the same proportion to revenue that this provinces will be by the end of 2013, the federal deficit would be in the range of $80 - $90 billion. Mind blowing. A deficit figure never seen by a federal government in Canada. It would trigger wage freezes, massive layoffs, large tax increases and a downgrade on the federal credit rating. Those actions would increase the deficit even more as unemployment rolls grew, the black market economy expanded, and costs to borrow new funds sharply increased. Wait. You say you've seen this movie before? Right. With a mucher lower deficit Trudeau, the older Trudeau, implimented wage and price controls, increased and expanded taxes, and the economy went into a ten year recession.

This is the new reality facing Newfoundland and Labrador. It is no longer the hypothetical. It is no longer the "naysayers" exclaiming the "sky is falling". Reality is here and the party is over. The inevitable result of gross fiscal mismanagement, flawed 1970's mega project thinking, and politicial corruption has rendered Newfoundland and Labrador as the proverbial "dead man walking". People in the streets are alarmed by the $725 million deficit. They can't quite understand how it came to this with such a booming economy. They don't understand its consequences. They are uneasy.

At the same time, and in the same universe, hyperinflation is affecting two key economic centers - Labrador and the Avalon. Avalon being the capital area with the primary population concentration, and Labrador being the sparsely populated resource centre. In these two areas of the province massive government spending on the civil service, and capital projects has fueled housing inflation. Along with that housing inflation has come large increases in personal debt and property taxes. Like a fire being fed by a warm wind these local economies have been pushed beyond their rational boundaries. On the one hand the provincial government has increased the civil service by 25% in the last seven years, with large wage increases, and on the other hand Nalcor, the provincial crown corporation in charge of hydro electricity production, has been spending hundreds of millions on the development of the Lower Churchill dams in Labrador. All of which has been fueled by oil revenues - one of every three dollars coming into the treasury is from offshore oil.

So, with the impending cutbacks to spending coming to deal with the deficits, the province is in the midst of sanctioning the largest ever publicly funded mega project in its long history - Muskrat Falls. At a projected cost of $7.5 to $12 billion, which doubles the province's gross debt, Muskrat Falls is a grand mega project that does the 1970's proud. Tom Marshall, Finance Minister for the province, states the development will not add to the province's debt and will pay for itself. A true bit of fantasy if there ever was one. He refers to the net debt, which is gross debt minus the "value" of "assets". Not unlike your personal worth on paper. However, as we all know too well, that worth is only on paper, and we still must pay those bills each month for evermore. It affects our spending, our financial decisions, our ability to acquire more debt, and so on. Marshall's ridiculous ponderance that the project will pay for itself, that somehow it won't be ratepayers and taxpayers paying it, in many ways sums up the tragic logic of our provincial government.

Marshall is so confident that the project will pay for itself, at no real cost to ratepayers, that his government will not allow the Public Utilities Board (PUB) to have a second look at the project's viability. In fact, as I write this, the provincial government is tabling legislation in the House of Assembly to force through a bill that exempts the PUB from setting rates for Muskrat Falls power. It is a thing of wonder.

So as we head into 2013, the year the equalization wars are to enter the national discourse, Newfoundland and Labrador is in a state of pre-financial meltdown unseen for some time in Canada. All those necessities like new infrastructure, hospitals, etc must somehow be carved out of an empty and otherwise overly committed treasury. All provincial labour unions have their contracts up for negotiation - for almost nine months now actually. The unfunded pension liability of the province continues to expand with no disciplined approach, or any approach other than to try and force unions to change their pension plans downward, in sight. Oil revenues are being clawed back by the feds now the exemption period is over under the Atlantic Accord. And just to give things that strange twist that is the twilight zone, we have a $5 billion land development that essentially creates a new city around St. John's. DO NOT ADJUST YOUR SET. This twilight zone is for real.