B.C. deeper in debt despite budget claims

Columists Lammam and Speer speculate that BC Finance Minister is ignoring capital expenditures when proclaiming a balanced budget.

by Charles Lammam and Sean Speer

The Fraser Institute

VANCOUVER, BC/ Troy Media/ – “B.C. is currently on target to balance the 2014/15 budget,” declared Mike de Jong, B.C.’s finance minister while unveiling the government’s latest financial update. Understandably, many British Columbians will take de Jong’s comments at face value.

In reality, B.C.’s government debt will grow again this year. So how can de Jong make his “balanced budget” claim?

Because he’s talking about the government’s operating budget – the difference between the revenue the government collects and the money it spends on programs such as health and education plus interest payments on past debt – while ignoring the capital budget.

Of course, de Jong’s focus on the operating budget makes political sense but provincial financial reporting uses a capital budgeting approach. When the government borrows to pay for capital spending (roads, schools, hospitals), it typically records only the annual interest payments and amortization expense in the operating budget.

Capital budgeting allows the government to spread the cost of capital spending over many years. That makes economic sense. But it also means taxpayers can lose focus on the overall debt, especially if the government’s operating budget is in surplus. For instance, this year the B.C. government expects an operating surplus of $266 million (now $82 million higher than February’s budget). Despite this “surplus,” the province continues to borrow and rack up another $2 billion in debt.

How do we square this seemingly counterintuitive result?

It boils down to the capital budget, which is in deficit. After all, the change in government net debt (gross debt minus financial assets) depends on both the operating budget and the capital budget.

Over the period from 2009/10 to 2012/13, both the operating and capital budgets were in deficit. Now, the operating budget is in surplus but the capital budget remains in deficit while overall government debt continues to grow. Since 2008/09, B.C.’s net debt has grown to $40.8 billion (17.4 per cent of GDP) from $26.2 billion (or 12.8 per cent of GDP).

This rate of debt accumulation can’t go on forever.

A recent study published by the Fraser Institute sheds light on B.C.’s growing government debt. The study focuses on the period from 2005 to 2017. It digs into the two sets of budgets and analyzes where the province is headed, absent a change in fiscal direction. The findings may surprise British Columbians.

Government finances become unsustainable if high debt saddles future operating budgets with increased interest payments and amortization expenses, prompting major spending cuts, tax hikes, and/or more borrowing. Worst case scenario: the debt spirals upward until financial markets are unwilling to lend to the government.

B.C. isn’t there yet. But there are risks to the government’s ability to maintain a sustainable fiscal policy. To ensure finances are sustainable, the government is going to have to reduce debt-financed capital spending and restrain the growth of program spending in the future. Spending restraint is especially critical if interest payments on the debt rise.

British Columbians must look beyond the headlines to understand what’s happening to their government’s finances. Further investigation suggests things are not as rosy as minister de Jong lets on.

Charles Lammam is associate director of tax and fiscal policy and Sean Speer is associate director of government budgets and fiscal policy at the Fraser Institute. Capital Budgeting and Fiscal Sustainability in British Columbia is available at www.fraserinstitute.org . www.troymedia.com

Just Posted

A tent housing a mobile vaccination clinic. (Interior Health/Contributed)
Over 5K jabbed at Interior Health mobile COVID-19 vaccine clinics

The clinics have made stops in more than 40 communities since launching last week

Provincial Health Officer Dr. Bonnie Henry talks about B.C.’s plan to restart the province during a press conference at Legislature in Victoria, Tuesday, May 25, 2021. THE CANADIAN PRESS/Chad Hipolito
Interior Health COVID-19 cases falling slower than the rest of B.C.

More than a third of provincial cases announced Thursday came from the Interior

A tent housing a mobile vaccination clinic. (Interior Health/Contributed)
Second dose vaccinations accelerating throughout region: Interior Health

To date, more than 675,000 doses have been administered throughout the region

Okanagan Lake (File photo)
Thompson-Okanagan ready to welcome back tourists

The Thompson-Okanagan Tourism Association expects this summer to be a busy one

Aerial view of a wildfire at 16 Mile, 11 kilometres northwest of Cache Creek, that started on the afternoon of June 15. (Photo credit: BC Wildfire Service)
Wildfire at 16 Mile now being held

Wildfire started on the afternoon of June 15 at 16 Mile, east of Highway 97

Marco Mendicino, Minister of Immigration, Refugees and Citizenship during a press conference in Ottawa on Thursday, May 13, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Canada to welcome 45,000 refugees this year, says immigration minister

Canada plans to increase persons admitted from 23,500 to 45,000 and expedite permanent residency applications

Emily Steele holds up a collage of her son, 16-year-old Elijah-Iain Beauregard who was stabbed and killed in June 2019, outside of Kelowna Law Courts on June 18. (Aaron Hemens/Capital News)
Kelowna woman who fatally stabbed teen facing up to 1.5 years of jail time

Her jail sentence would be followed by an additional one to 1.5 years of supervision

Cpl. Scott MacLeod and Police Service Dog Jago. Jago was killed in the line of duty on Thursday, June 17. (RCMP)
Abbotsford police, RCMP grieve 4-year-old service dog killed in line of duty

Jago killed by armed suspect during ‘high-risk’ incident in Alberta

The George Road wildfire near Lytton, B.C., has grown to 250 hectares. (BC Wildfire Service)
B.C. drone sighting halts helicopters fighting 250 hectares of wildfire

‘If a drone collides with firefighting aircraft the consequences could be deadly,’ says BC Wildfire Service

A dose of the Pfizer-BioNTech COVID-19 vaccine is pictured at a vaccination site in Vancouver Thursday, March 11, 2021. THE CANADIAN PRESS/Jonathan Hayward
NACI advice to mix vaccines gets varied reaction from AstraZeneca double-dosers

NACI recommends an mRNA vaccine for all Canadians receiving a second dose of a COVID-19 vaccine

A aerial view shows the debris going into Quesnel Lake caused by a tailings pond breach near the town of Likely, B.C., Tuesday, Aug. 5, 2014. THE CANADIAN PRESS/Jonathan Hayward
Updated tailings code after Mount Polley an improvement: B.C. mines auditor

British Columbia’s chief auditor of mines has found changes to the province’s requirements for tailings storage facilities

A North Vancouver man was arrested Friday and three police officers were injured after a 10-person broke out at English Bay on June 19, 2021. (Youtube/Screen grab)
Man arrested, 3 police injured during 10-person brawl at Vancouver beach

The arrest was captured on video by bystanders, many of whom heckled the officers as they struggled with the handcuffed man

Patrick O’Brien, a 75-year-old fisherman, went missing near Port Angeles Thursday evening. (Courtesy of U.S. Coast Guard)
Search for lost fisherman near Victoria suspended, U.S. Coast Guard says

The 75-year-old man was reported missing Thursday evening

Most Read