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Government should sock it away, in case

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Aesop's fable of the grasshopper and the ant comes to mind when considering Manitoba's NDP government and its spending and borrowing.

In the fable, the grasshopper dances and plays as summer and fall come and go. Meanwhile the ant, while also enjoying the pleasant days before winter, plans for its arrival by storing away enough food to outlast the winter. When winter came, the grasshopper begged the ant to share the food stocks the ant had wisely put away.

The proverbial winter will come for Manitoba. Will it be able to deal with it?

For the purpose of this column, 'winter' is either drought or another disaster. Our last drought was about 10 years ago. Manitoba Hydro lost $436 million and electricity rates jumped 10 per cent to make up for it.

Last month, World Water Day was marked by continuing concerns for the welfare of the billion people lacking clean abundant water. The attention paid to water is justified: Some speculate water will eventually be worth more than oil. With recognition of the importance of water now practically universal, why is it we fail to prepare for its lack?

A drought can be more devastating than a flood. The earliest written records of Manitoba droughts go back to 1772, with later observations of drought recorded throughout the 18th, 19th and 20th centuries. More recently, Manitoba experienced nine droughts over the 30-year period between 1955 and 1984. The next one is overdue. And, although the climate warming debate clatters on, scientists suggest Manitoba should prepare for more frequent droughts in the future.

When a drought hits, virtually every aspect of the economy is damaged. Depending on the area affected, the degree of the drought and its duration, the implications can be bad. Yet, with today's technology and economic diversification, no serious scientist anticipates a drought that would bring a western society to its knees, unlike the impact of the so-called mega-droughts that helped end the Toltec and Aztec civilizations (circa 1000 A.D. and 1550 A.D, respectively).

That said, in the case of a sustained drought, farmers' crops wither and their incomes plunge. Outside Winnipeg, retailers suffer a decline in sales, extending from trucks, cars and farm implement sales to clothes. Jobs disappear and new ones are slower to materialize. More farms are sold and the sellers move away, especially if the drought lasts more than a year. (Manitoba's longest drought since the 1930s lasted 36 months, beginning in 1980.)

House prices can suffer and government deficits rise. Hydroelectric exports fall, while imports of electricity from the United States can soar -- leading to more pressure on residents as rates rise to compensate for the losses. Government takes a hit, and expenses rise while individual and corporate tax receipts fall.

All of this should suggest to government's policy-makers that caution in spending and borrowing is always a wise strategy. Unlike the 2008 global credit crisis and attendant recession, which 'came out of nowhere,' droughts, like floods, are predicable.

Running down 'rainy day' reserves, while still recording deficits and new borrowings, weakens an economy's ability to withstand shocks, whether from floods, droughts or other economic surprises. Manitoba lacks the natural resource revenues of provinces to the west of us, as well as the level of industry found in Ontario and Quebec. These advantages can reduce the impact of natural and economic disasters on those other provinces.

A province such as ours should be prudent, have the reserves to meet head-on not only the problems that will come from floods and droughts, but also to be able to at least blunt the effects of other national or global events -- remember 1981's 19 per cent mortgage rates?

Even Manitoba Hydro, with its penchant for favouring optimistic forecasts, accepts that a five-year drought -- only one of the utility's major risks -- could cost it and its ratepayers $2 billion or more. Like the government, Hydro has no net financial reserves -- its retained earnings are composed of deferred costs and intangible assets.

Drought is overdue. And, while other disasters are not as predictable even to the limited degree the occurrence of a drought can be, they too will come.

Better to emulate the ant and not the grasshopper.

 

Graham Lane is a retired chartered accountant. He was chairman of the Public Utilities Board from 2004 to 2012.

Republished from the Winnipeg Free Press print edition April 16, 2014 A9

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About Graham Lane

Graham Lane is a retired chartered accountant who worked in the public and private sectors for 50 years, concluding his career as chairman of the Manitoba Public Utilities Board.

He has also held key positions at Credit Union Central, Public Investments of Manitoba, the Manitoba Public Insurance Corp., the University of Winnipeg, and the Manitoba Worker's Compensation Board.

Before gaining his CA designation in Quebec, he was third in Canada in the then-national intermediate examination. He has a diploma in business administration from the University of Western Ontario and has served on numerous charitable and service boards.

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