Second-quarter financials alarming

Commentary, Taxation, Graham Lane

Based on Finance Minister Jennifer Howard’s recent update on her government’s financial situation, taxpayers should be alarmed. Despite the unexpected tax and fee hikes of the last two years, she not only expects a deficit of close to $500 million for the NDP government’s summary 2013-14 accounts, but has also raised doubts balanced annual accounts can be achieved in the years ahead.

With considerable fanfare, Howard released the update, asserting her government “is beating its deficit-reduction target.” Instead of the $518-million deficit of this year’s provincial budget, she now expects one of $485 million. She blames a supposedly faulty census by Statistics Canada for part of this yawning shortfall. The agency denies this, with no complaints about the census coming from any of the other provinces and territories.

While Howard reiterates an intention to eventually achieve a balanced budget, true expense restraint and considerably more information would be required before any impartial observer could conclude the government is on track to ‘slay’ the demon deficit. Annual deficits have plagued the NDP since the government’s 2008-09 fiscal year. From its return to power in 1999 till now, the government has increased its spending by 21/2 times the rate of inflation plus population growth.

What is missing in Howard’s news is recognition that core government finances and her summary accounts would look much worse than the already-glum deficit outlook absent the inclusion of forecast net income for Crown corporations (and expected surpluses from other government-funded agencies), from which government is precluded from withdrawing funds. Core government operations, which exclude the ‘commercial’ Crowns, are reporting ongoing annual deficits, far away from any prospect of balance.

Making things look better upfront (but hampering the future), it appears $900 million of this year’s claimed $1.5-billion “investment in infrastructure and capital asset renewal” will not be “expensed” in 2013-14, deferred instead for amortization in future years.

When the actual level of investments in infrastructure exceeds the amortization expense year after year, flexibility is lost for future years and governments. This is a path that leads toward credit-rating downgrades, harsh civil service layoffs, or more tax hikes and fee increases.

Leaving the focus on the reported deficit and the low prospect of achieving a balance any time soon, the latest financial report also reveals disconcerting information about the government’s debt levels. Both gross and even so-called net debt levels have risen again and are expected to even go higher.

Gross debt is now expected to reach $30.2 billion by March 31, 2014, up from the $27.9 billion a year earlier. This would represent almost 50 per cent of gross domestic product, a particularly alarming ratio for a province, especially one where spending continues to balloon out of control amid chronic annual deficits. (That ratio is expected to grow more rapidly as Hydro pursues an extremely risky $34-billion spend-up for new transmission and dams in northern Manitoba). As for the government’s focus on so-called net debt, I find no solace. When debt is to be repaid by a Crown agency, ratepayer bills provide the money — whether taxes and fees to government or utility bills to ratepayers, it’s still coming from the same pockets — ours, the citizenry.

After following Howard’s announcement and taking the time to read the supporting documents provided, my view is all Manitobans should be increasingly concerned. The NDP’s spending problem is not acknowledged, anywhere. And, with Ottawa determined to balance its own books for 2015, an unlikely rescue will come in the form of higher federal transfers. Indeed, funding part of the NDP’s spending boom was the doubling of federal transfers to Manitoba since 1999. There is no prospect of another doubling of easy “outside money” in the next decade, so Manitoba will increasingly have to live within its means.

If this government doesn’t put on the brakes, and soon, I foresee credit-rating downgrades followed by even higher taxes and fee levels. Already owing $30 billion, with much more debt to come, the interest rate hikes that almost certainly lie in the future will prove costly to a cash-strapped Manitoba government and its taxpayers.

Premier Greg Selinger was cautious in providing tentative assurance that “major” tax hikes were not contemplated for 2014. I am not surprised with his caution.