Although I covered it off in my rebuttal to the Minister of Finance Thomas Marshall in the last post I thought maybe a graphic would be a more compelling way to illustrate what has been going on in Newfoundland and Labrador. I am sticking with roughly the same time frame as the minister but I will take 1996 as my base year and end in 2009. This is generous on my part because if I took 1997 and ran through to 2010 it would show the rebound in corporate profits in 2010 and start from Tom’s trough year (1997). So what I have done is create an index by normalizing the time series to 100 for 1996. Here I have graphed profits before taxes (profits), total labour compensation (wages), net domestic product (NDP) and all tax revenues after subsidies (tax) save for royalties. All values are nominal.
Click for a crisper image
So yes some wage growth but nothing sufficient to bring the wages of workers in the province up to the national average. This in the context of a province caught up in tidal wave of profits. Keep in mind that in the interview the minister only cited wage growth and was silent about the near exponential rate of growth in profits. But thanks to that provocation I included taxes and economic growth (captured by NDP).
Two things stand out. Wages did not manage to keep pace with economic growth (NDP) and tax revenue growth was relatively flat. This tells me that the government in the province has essentially been using tax cuts to make workers, corporations and small business feel wealthier while at the same time jacking up public spending and paying for all of it with royalty revenues. From a political point of view it is a slam dunk. The problem is that it leaves the province highly dependent on oil revenue to grease the wheels and pay for public infrastructure and services, which in turn gives the oil and gas sector even more clout and it does very little in terms of economic diversification.
Some conservative economists in the province have recognised the instability in the fiscal structure but their solution is rather unimaginative: rapid provincial debt repayment and spending cuts. But this solution is equally as short sighted as the government’s. Neither account for what happens after the oil. When that actually happens is hard to call but it will. For conservative economists I suppose this is not a problem. Diversification happens naturally so they do not need to tell a story about what comes after the oil. Curiously though, if they truly believe something does come after the oil then it makes little sense to be worried about the provincial debt and declining oil revenues as something will come up to replace the sector.
If on the other hand the province’s actual history of lurching from one commodity boom to bust and bankruptcy and then administration by Whitehall and later by Ottawa is anything to go by then the government cannot really afford to be so reckless. So if you agree that austerity is not the route to take then you are left with the need for economic diversification and modernization all while keeping the growth of the public debt at a low rate. That leaves tax increases and or a more robust royalty regime in order to change the fiscal structure and engage in an aggressive process of modernization and diversification without blowing the lid off public debt which as it now stands is a very modest 27-28%.