Extraordinary reverie

In a recent interview with Murray Brewster of The Canadian Press, the premier says if the Deep Panuke offshore gas project goes ahead, the royalties will go into general revenue. They will not be used directly to reduce the province’s $12.4-billion debt, as former premier John Hamm did with the $830-million offshore revenue settlement from Ottawa last year.

Nothing ground-breaking in this revelation. Royalties from the existing Sable project already go into the big pot. Only if they contribute to a budget surplus do they reduce provincial debt.

What is extraordinary is Mr. MacDonald’s take on the use of any future revenue windfalls.

“Should we ever run into a large influx of money, as we did with the $830 million,” he told Mr. Brewster, “we would absolutely do the right thing and take a look at putting that towards the debt.”

Sorry, Mr. Premier, but looking at putting extraordinary revenue on the debt isn’t the right thing to do.

It’s not even the legal thing.

The debt reduction plan the Conservatives unveiled in April 2005, and later enshrined in law, explicitly says, “Government will continue to be required to place extraordinary revenue on the debt.”

The legal requirement is to do it, not to think about it.

And this requirement wasn’t even a new one in 2005. It had already been legislated in the 2003 debt plan, which reflected Mr. Hamm’s longstanding promise to use any offshore windfall for debt reduction.

Could Deep Panuke revenue trigger this legal requirement?

Yes, if it bumped up our revenues sufficiently. Remember that the $830 million from Ottawa was a guaranteed minimum payment, based on an estimate of the value over eight years of the 70 per cent of Nova Scotia’s offshore revenue that was subject to being clawed back under federal equalization. But if rising prices or higher production (say, from Deep Panuke or any new field) pushes the province’s offshore revenues higher than this estimate, Ottawa is required to make additional payments to offset equalization clawback.

If the actual value of the offshore accord payments turns out to be higher than the estimate, should the extra amount go to debt reduction? Clearly it should. If the estimate counts as an extraordinary revenue, how can the actual amount be anything else?

Of course, because of project timing or the downgrading of Sable reserves, Deep Panuke may not push offshore revenues beyond the accord’s estimated floor value and there may not be an extra windfall from Ottawa. In that case, Mr. MacDonald should be listening to critics, like Brian Lee Crowley of the Atlantic Institute for Market Studies, who want annual royalties from Panuke used to accelerate the repayment of debt rather than tapped for current spending.

This is a prudent plan since the sustainability of Nova Scotia’s offshore is a question mark. We have one producing project and one maybe. If Panuke goes forward, it may simply offset faster-than-expected depletion of Sable. Until we see a more certain future for this industry, we should not be spending the royalties as if they were the sort of reliable long-term cash flow you need to sustain increases in spending on services.

So Mr. MacDonald not only needs to bone up on John Hamm’s debt plan. He should stop riding on its laurels and add some debt-reduction effort of his own.