Terry McDonald: Riding the boom and bust cycle
The headline of the Financial Times tolls the bell of economic doom: "Oil rout would have wrecked an independent Scotland's finances."
The massive drop in oil prices has flipped the economies of oil-producing regions on their heads, and this new normal appears to be settling in for an extended stay.
This, of course, applies to Newfoundland and Labrador as well. Budgets forecasts based upon optimistic oil revenues are being torn asunder, with massive deficits and austerity talk in their wake. It is the fate of the single-resource-dependent economy to ride the cycle of boom and bust, feast and famine on the market's whim.
It is known as The Curse of Oil, and it is hardly a new phenomenon. One of the manifestations it took in Canada was that of "Dutch Disease". High oil revenues drive currency values upward, and this undercuts the competitiveness of other industries, making the economy further dependent upon the vagaries of the petroleum market.
There is only one way off the revenue roller-coaster that oil wealth provides, but it is a politically difficult path of restraint and counter-cyclical finances.
When prices are high and coffers are filling quickly, this is not the time for tax cuts and spending sprees — it is a time for saving and the diversification of investments. That way, when the bottom falls out of the market, there is money that has been set aside for counter-cyclical spending, to head off a recession.
It is not just fanciful talk, either. Norway has managed to perform in this regard — to an astonishing degree. Norway's investment fund reached the staggering mark of five trillion Kroner for five million citizens, thus "We are all millionaires now".
There is even a movement afoot in the Norwegian parliament to mandate that the fund entirely divests itself of fossil fuels — further insulating Norwegian society from oil-price dependence while following the lead of other major funds toward climate-responsible investments.
Of course, such a move would be easier for Newfoundland and Labrador were the windfalls associated with high oil prices not clawed-back from federal equalization formulae. The $11 billion that Newfoundland and Labrador lost out on through a broken Harper pledge would go a long way towards establishing such an investment fund in the name of half a million people.
The province cannot invest in a counter-cyclical way if it loses the benefit of the high points of the cycle.
It is this line of thinking that has propelled new momentum into the Scottish independence movement in the face of lower oil revenues. The Scottish National Party has seen a surge in membership since the failed referendum (more than double) and is dominating in the polls.
Arguing that Westminster has squandered the revenues accrued, Scots seem willing to face the curse of oil on their own.
Newfoundland and Labrador is no innocent here. Despite the giant renege from Harper, Manning, and company, the province still saw record revenue, and, yet, has not seen to insulating itself from oil price dependence.
Nonetheless, despite the PC profligacy here at home, our budget situation would look a great deal rosier if the federal Conservatives had honoured their end of the deal.
But hey, I've been saying that for years.
Follow Terry McDonald on Twitter: @Terry_McD
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