As the pundits weighed in with their year-end commentaries on Nova Scotia politics I kept hearing two items of conventional wisdom.
One, that Nova Scotia’s fiscal situation is worsening as the result of declining revenues and;
Two, that the Liberals’ get tough approach to public sector workers is not hurting them in the polls.
There is reason to challenge both assertions.
First, on the dire state of the province’s finances, I’ve rattled on about this before. My September post (Public Accounts contradict Liberal Gloom and Doom) dealt with Liberal efforts to convince us of an impending fiscal meltdown prior to unveiling their austerity plan before public sector union leaders. The problem was the facts did not support the story told by minister of finance Randy Delorey. A few weeks earlier, the audited public accounts for 2014-15 had been tabled, showing a deficit 50% lower than predicted in the budget and an improvement in the debt-to-GDP ratio. Delorey ignored those positive but inconvenient (for him) details and pressed on with his insistence that the fiscal sky is falling.
Last month, in advance of the Liberals’ latest attack on the wages and collective bargaining rights of public sector workers, Delorey was back, on cue, with more of the same. The December forecast update (an annual pre-Christmas event) was milked for as much bad news as could be found. The Chronicle-Herald, which is often to the McNeil Liberals what Pravda was to Joe Stalin, came through with the headline the government wanted – “Nova Scotia faces $118.6m deficit hike.” The paper’s editorial page hammered in the message. Revenues are “tanking” and the update represented “a grave and rapid deterioration in provincial finances.”
“Rapid deterioration”? It depends on who you listen to. To justify the gloomy revenue outlook for this year and next, Delorey’s outlook chose to disregard more optimistic private sector forecasts, like the ones from the Conference Board of Canada and RBC.
Real GDP growth forecasts
Conference Board 1.8% 2.3%
RBC 0.9% 1.8%
NS Finance 1.0% 0.8%
In its eagerness to beat the drum for austerity, the Chronicle-Herald even ignored a story about the Conference Board forecast that appeared on its own business pages a few days before Delorey’s tale of woe. In an interview about the positive growth numbers, a board economist told a Herald reporter that as a result of the shipbuilding contract and offshore oil exploration “Nova Scotia is looking at a very sunny outlook, much better than the province has seen just recently.”
Only time will tell whether the Eeyores at Finance or the private sector Pollyannas have it right. In the meantime, it suits the government’s agenda to claim penury, and the media go along with it. (It should also be noted that it’s a potential win-win for the Liberals. If the finance department predictions come true, they have justification for their restraint policies; if the professional forecasters are right revenue increases nicely a year before an election).
$$$ for Big Oil
The discrepancy between government and private forecasts is not the only part of the Delorey’s December update that should be looked at more closely. Most of the $118.6 million deficit hike is not because the main revenue streams – income and sales taxes – are “tanking.” It’s the result of a Prior Years’ Adjustment (PYA) of an additional $98.2 million to cover some of the cost of dismantling the Sable natural gas project. This figure represents royalty revenue the Liberals expect to pay back to ExxonMobil and its partners to tear down Sable’s offshore wells and production platforms. And there may be more to come. According to Delorey, “increases in the estimated decommissioning costs will continue to create significant Prior Year Adjustments.” The latest hit to the treasury from the decline of Sable follows a $145.6 million negative PYA for Sable decommissioning that helped to bloat the 2013-14 deficit – the one that produced the $679-million shortfall the Liberals could try to blame on the NDP.
When the previous PYA is combined with the latest one it amounts to almost a quarter of a billion dollars that we’ve already spent but now are preparing to repay to help ExxonMobil abandon the offshore. Although previous governments – especially the Conservatives – spent most of the offshore royalty cash, paying back large chunks of it seems to be a Liberal initiative. When the NDP was in power, budget documents suggested that decommissioning costs were already being deducted from royalties – much like when income taxes are taken off at source.
In 2012-13 budget documents reported that “production volumes will continue to decline as the Sable Offshore Energy Project nears the end of its capacity. The accrual of abandonment costs that interest-holders can deduct against royalties has a significant negative impact on offshore revenues.” In 2013-14, budget documents reported “accrual of abandonment costs that interest-holders can deduct against royalties has a significant downward impact on offshore royalty revenues.”
A “significant downward impact” indeed. It’s like finding out at tax time that someone in payroll made a mistake and didn’t take enough tax off paycheques that have already been spent. Over the last two years, the Liberals have set aside $243.8 million on top of whatever abandonment costs were previously deducted against royalties and claim to be ready to pay more. Curiously, they have done this without any explanation of how these costs are arrived at and why Nova Scotia is on the hook to pay them.
The Sable royalty agreement, signed on the day the Russell MacLellan Liberal government left office in 1999, provides no particular enlightenment on that point. The agreement defines “an Abandonment Cost” as an allowed deduction against royalties and provides for arbitration of disputes concerning operating costs. The agreement also makes specific reference to “the basis on which mandatory contributions to any fund in respect of future Abandonment Costs shall be recognized for Royalty Purposes.” The agreement is silent on whether such a fund exists or how abandonment costs are determined.
Last June, when the media caught onto the fact that Nova Scotia was on the hook for undetermined decommissioning costs it was not because of information already provided in the fine print of budget documents and updates. Rather, it was the result of public comments by a SOEP official who said decommissioning could begin in 2017. According to a CBC report, SOEP did not know at the time how long it would take to dismantle the offshore wells, nor was it even sure when the fields will stop producing. (To the end of November, average monthly production from Sable was down 5% from the year previous and 77% below 2001, the peak production year).
In response to the SOEP guy, the minister of energy, Michele Samson, confirmed that the province has been setting aside money (presumably including the $145.6 million in 2013-14) without knowing the full cost of decommissioning or “if decommissioning even does take place.” Since then, without further explanation from the minister, the Liberals have set aside another $98.2 million and are preparing to add more. In total, the Liberals are preparing to give back at least 15% of the $1.7 billion in royalties collected by the province since operations began in 1999, reducing by at least half the $3 billion in royalties anticipated when the Savage-MacLellan government first hyped the project over 20 years ago.
There are a couple of possible scenarios at play, neither of which makes any recent government look particularly good. One is that the Liberal government of the 1990s entered into a really bad deal with Big Oil. Later governments failed to make allowance for that bad deal. And now the present Liberal government is being prudent in biting the bullet and quietly setting aside the big bucks needed to pay for the bad deal negotiated by its predecessor Liberal government.
The other possibility (suggested by Michele Samson’s comments) is that decommissioning will end up costing less than the (on paper) money set aside. As long as no one calls them on it, this helps the Liberals to sell their austerity message now while anticipating a revenue windfall (on paper) when a different, lower cost estimate comes along at some convenient future point (such as before the next election).
Whatever’s going on, it seems like an odd strategy to publicly disclose that hundreds of millions have been set aside to pay for decommissioning costs that have yet to be determined. And it looks a bit fishy when the government adds to the size of the potential liability whenever it needs justification for making the fiscal situation appear worse than it is – sort of political slush fund in reverse,
Who cares? The polls are great
In addition to the ready acceptance that the arse is out of the finances, the notion that the Liberals can bash public sector workers without political consequence has also become an article of faith. As Pravda (oops, I mean the Herald editorial board) triumphantly put it on Dec. 12 (Polls boost McNeil’s stand): “When you have a budget deficit to lick and wage restraint to sell, it doesn’t hurt to have a soaring public opinion rating behind you.”
The cause of the Herald’s delight was release of the December quarterly report from Corporate Research Associates showing support for the Liberals up 14 points from August to 64%, satisfaction with the government steady at 55% and McNeil’s best premier rating up eight points to 45%. To the Herald deep thinkers the reason for that was obvious: public support for government austerity and restraint in public sector pay. “That the government’s support has risen in the face of this very firm public stance is pretty strong evidence the public agrees with the premier. His stock is rising because of his firmness on labour costs, not in spite of it.” (my italics) If it were just members of the Herald editorial board high-fiving over the latest CRA poll results it wouldn’t matter that much. But from the amount of resigned sighing and head-shaking observed over the holidays, others who don’t share the paper’s neocon views seem to have accepted the analysis. They should look closer to see if there is another interpretation.
One obvious factor driving provincial Liberal support at the expense of the other parties is the federal election. It happens like clockwork, especially when the federal election brings about something new and exciting. It happened back in 1997 when the federal NDP under Alexa McDonough had their big breakthrough in Atlantic Canada. Had there been a provincial election around the same time in Nova Scotia the NDP would probably have won. It happened in 2011 when the federal NDP had its breakthrough in Quebec and achieved Official Opposition status. CRA polling from that time shows support for provincial New Democrats across the region going up, Liberal support going down. And it has happened again – the other way around – in the wake of the Trudeau Liberals’ sweep of Atlantic Canada.
The Herald’s editorial does acknowledges the Trudeau factor, pointing out that the CRA survey found support rising for Liberal governments in P.E.I. and New Brunswick, but it does not look very closely at the numbers. That closer look casts doubt on the thesis that “firmness” with public sector workers is the reason for the McNeil government’s boost in the polls. It is clear that a rising Liberal tide in Atlantic Canada raised the boats of all Liberal governments and would-be governments. (The Newfoundland Liberals swept to power in that province in a November election). But the Liberal governments and premiers in Prince Edward Island and New Brunswick enjoyed a much bigger boost than the McNeil Liberals on all indicators.
- On party preference, the McNeil Liberals’ 14 percentage point gain over the quarter was less than the New Brunswick Liberal government’s 19 point gain and the P.E.I’ government’s 15 point gain.
- On the satisfaction-dissatisfaction metric, the McNeil Liberals were virtually unchanged – from 54-36 satisfied-dissatisfied in the September report to 55-37 in December. The New Brunswick Liberals improved from 38-50 in September to 53-46 in December. And on the Island, the Trudeau effect had the provincial Liberals sailing along at a 74-20 satisfied-dissatisfied ratio, an improvement from 57-29 in September’s report.
- On best Premier, McNeil’s eight-percentage point improvement puts him back to where he was last March, but still five percentage points below his peak two years ago. As for Brian Gallant in New Brunswick, his approval rating at 39% was below McNeil’s but represented a 13-percentage point jump from September. And P.E.I. Premier Wade MacLauchlan’s approval rating went up 19 percentage points, to 48% over the period.
So, the Herald may be right that McNeil’s Liberals are getting a boost from austerity and public sector wage restraint. But when his relatively modest boost is compared with that enjoyed by the other Maritime Liberal Premier’s, it can also be claimed that support for him and the Liberals would be greater if it were not being dragged down by those policies.
Another factor that the Herald did not take into account was the actual political landscape when the poll was taken. CRA discloses that it interviewed 804 Nova Scotians between Nov. 10 and Dec. 1 but doesn’t specify the pace of the interviews. Assuming they were spread over the three- week period, about half would have taken place before the Andrew Younger affair culminated in the fiasco around the resignation of McNeil’s chief of staff. And all of the interviews occurred before the Liberal strategy to achieve wage restraint through negotiation feel apart, to be replaced with another assault on labour rights, accompanied by demonstrations and all-night marathons at the legislature.
It may be that the majority of Nova Scotians do support such heavy-handed and unsavoury governance. One hopes not, and a closer look at the CRA poll at least leaves the question up in the air.