tag:blogger.com,1999:blog-30694877.post115825517684356220..comments2023-10-28T11:29:07.881-03:00Comments on Politics from a New Brunswick perspective: Bernard Lord to cut income taxes?nbpoliticohttp://www.blogger.com/profile/09517401409653124082noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-30694877.post-1158364449532226602006-09-15T20:54:00.000-03:002006-09-15T20:54:00.000-03:00Yep, your missing something. Gov'ts don't apply GA...Yep, your missing something. Gov'ts don't apply GAAP to their books. This allows them to record assets and debts at their book (nominal) value, rather than their market value. The reasoning is that gov't bonds are long-term debt and, given that exchange rates fluctuate a lot, rapidly converting debt on the books could create an improper impression of a gov't's financial health. Who knows, over forty years, this might be sound policy.<BR/><BR/>In the near term though, say over a decade, exchange rates can play real havoc with debt service costs. During the nineties, the dollar fell from the mid-eighties into the low sixties twice, and once again in 2002. Meanwhile, the McKenna gov't issued US denominated bonds, because they had lower interest rates throughout the early nineties. The result was that, when the dollar dipped, debt service costs, which are regularly paid in greenbacks, went through the roof.<BR/><BR/>When Lord came in, he was faced with debt that had to be paid in US dollars, and revenues in Canadian dollars, which were falling against the greenback. Enter the currency swap. From 2000 onwards, NB Finance unloaded its US debt at a discount, so it could pay off the debt in Canadian dollars, at a constant (rather than a fluctuating) rate. In terms of money management, this is considered prudent because, for the most part, gov't revenues come in at a constant rate (unless you have a lot of oil) so it makes sense to pay off your debts at a constant rate.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30694877.post-1158353063574974662006-09-15T17:44:00.000-03:002006-09-15T17:44:00.000-03:00I have some questions. Why is holding debt in ame...I have some questions. Why is holding debt in american dollars not transparent? Isn't it illegal to account for debt without showing the exchange rate? <BR/><BR/> If you have debt in american dollars, why is it 'prudent' to convert your debt while your dollar is rising in value? Very little debt is floating, most is debentures, so if they still had that debt in american funds, with the exchange rate we'd have far less debt. Or am I missing something?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30694877.post-1158286435987819362006-09-14T23:13:00.000-03:002006-09-14T23:13:00.000-03:00Fair point on indexation as the only true argument...Fair point on indexation as the only true argument against it is that it is inherently inflationary. In times of modest growth, indexing tax brackets doesn't mean much, as government has time to respond to bracket creep with adjustments to tax brackets. However, as we discovered in the 70s & early 80's, when growth is stronger indexation can fuel government spending (& taxation) as the gov't is continually playing catch up with taxation to pay for revenue lost through indexation. Its the vicious, rather than virtuous, cycle.<BR/><BR/>However, my main point in writing is to comment on your observation about net debt. You've actually wandered onto my territory there. The biggest driver of provincial debt since 2001 (approx) hasn't been provincial spending (although they have managed to spend handsomely), its been recognizing past debt. One of the hangovers from the previous government was more than $1.5 billion in US denominated debt. This was money borrowed in the early to mid-90s, beginning when our dollar was in the 85 cent range. Although that might have seemed wise then, the story of the dollar between 1993 & 2003 was its weakness against the greenback. In fact, it was made worse as the Dept of Finance kept reporting this US debt in nominal terms (ie. not adjusting for the change in exchange rates). Despite very modest changes in debt levels, debt servicing grew substantially in the late 1990s, a period of modest interest rates. <BR/><BR/>When the Lord crowd took over they took a decision long avoided by the previous crowd. They opted to get rid of any non-loonie-denominated debt. As public policy, this was perfectly sound; its folly to assume debt in a currency that is appreciating against that of your tax revenues. The result was a series of debt swaps between 2000 & 2004, converting $US debt into loonies. It actually worked reasonably well until the loonie began rising in 2003. After that the media started reporting that the province was speculating in the currency markets, which wasn't even close.<BR/><BR/>However, the impact of these swaps are laid out in your charts. Whenever the province converted its debt, it had to start reporting it at the converted rates (which really were closer to fair market rates). Prior to that, they had been fudging. Its why Moody's took such a dim view of provincial bonds back in the 90s.<BR/><BR/>In any event, the benefits of these swaps can be seen in the main estimates. Between 02/03 & 06/07, servicing the provincial debt has fallen by $110 million a year.<BR/><BR/>01/02 - $654 million<BR/>02/03 - $685 million<BR/>06/07 - $575 million<BR/><BR/>Over the same period interest rates have actually doubled (2.25 to 4.5%). <BR/><BR/>So, if you want to look at this objectively, you have to allow that, in fact, debt management under the current crowd has been far more transparent than under their predecessors. If PNB had been forced to use GAAP when reporting its debt, provincal debt in the final McKenna & Theriault years would have choked off a lot of investment. As it turned out, they only put off recognizing the debt until it was someone else's problem.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30694877.post-1158282595233313172006-09-14T22:09:00.000-03:002006-09-14T22:09:00.000-03:00Keep in mind that other increase: property tax. T...Keep in mind that other increase: property tax. That's worth looking into, its been awhile but I remember doing a study on NB and NS and noticing that while one depended more highly on property taxes, the other depended more highly on income taxes. I would think NB would be the latter, but its been awhile and I'm tired of looking at numbers. I'd be surprised if they increased their reliance on pt is they were already quite high, but that may be a result of not getting enough from income taxes.Anonymousnoreply@blogger.com