Oil, wealth and caution at the finish line
As we head toward the finish line in the 2011 election campaign, it's striking that all three parties have been cautious about increasing spending.
The potential biggest ticket of the NDP platform is universal and publicly funded home care and long-term care, but the emphasis is on "planning" for it. The Liberals promise to get better value through "smarter" spending in health care; the PCs' optimistic "New Energy" blueprint has "fiscal responsibility" as its first section.
What's happened? In a word, oil.
The upside: oil has allowed the province to get off equalization and spend in areas it never thought possible.
The downside: we have become dependent on one of the world's most volatile commodities.
We're not strangers to the vagaries of international commodity prices.
At the height of the Depression, Newfoundland's major export was salt cod. Prior to the crash, in 1929-30, a quintal of cod was worth, on average, more than $8. Three years later, the price was cut in half, and depending on the grade, the price dropped even more substantially.
Tens of thousands of people were relegated to the paltry government dole handout of six cents a day.
Predicting commodity prices is a game rife with uncertainty. As recently as 2003, when the Royal Commission assessing the province's place in Canada made its report, their attempt to get a handle on future oil prices, and potential revenues, resulted in this statement: "Long-term oil prices in the order of $24US a barrel, are not at all assured."
Of course, oil has been selling at a much higher price, and the benefit to the province's treasury has been substantial.
In the eight years the finance department has been tallying offshore royalties as a separate source of revenue [including the forecast for 2011-12], oil has added $11.88 billion to the province's balance sheet.
Increased corporate taxes, much of that from oil companies, have added another $1.3-billion, for the six years from 2004 through 2009.
Those billions have been used to reduce debt (unthinkable in the days before oil), increase spending in health and education, improve infrastructure, and pay higher salaries to everyone from nurses to teachers to government employees.
Oil has also allowed the province to come off equalization, to produce more than 82 per cent of its own revenue (55.9 per cent in 1995-96), and reduce the percentage of spending going toward the debt (excluding pension liabilities) from 15.8 per cent in 1996-97 [$531-million] to a forecast six per cent in the current year [$386-million].
Those are all heady numbers. Yet, it's easy to forget where all that money comes from and how quickly the flow could be interrupted.
When world oil prices began their steep upward climb in 2007, provincial revenue shot skyward. In the time since, oil prices declined, but production kept up because the third offshore field came online, and the Hibernia South expansion took place.
By 2017, Hebron will be producing oil, but the other fields will be in decline. And beyond that date, there are major question marks because there is no fifth, six, seventh, eighth field on the horizon.
Warning signs The rags to riches story in Newfoundland and Labrador public finance may not be without precedence, but it is remarkable all the same. Yet, even in the midst of this bonanza, serious questions have been raised.
John Noseworthy, the former auditor general (and the PC candidate in Signal Hill-Quidi Vidi in this election), put it on the line in his last report on the province's financial statements:
Oil is a non-renewable resource and offshore oil royalties will not always be available to fund Government programs. Therefore, the sustainability of current and future Government programs will depend on other revenue sources.
Noseworthy also expressed concern about unfunded pension liabilities and the long-term bill for health and retirement benefits for civil servants and other provincial employees.
How many of us have asked these questions:
- What would happen if oil production was interrupted because of technical problems or an environmental catastrophe?
- What if oil prices plummeted?
- What "other revenue sources" could we reasonably and quickly marshal to take the place of offshore royalties?
There has not been much talk of any of those scenarios in this election. Only a determination to exercise prudence and care in spending the income generated by oil. Perhaps, in the midst of plenty, this is a debate politicians can't stomach right now.
But it’s a talk that needs to happen once the campaign buses have been parked and the placards put away.