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

Abbotsford police chief speaking to Liberal candidate after second ad appears featuring photo of officer

Jati Sidhu had said an ad with the same photo posted last Friday was ‘not appropriate’

Local Liberal MP Jati Sidhu says he forgives Trudeau for brownface photos

Sidhu says Trudeau ‘didn’t know any better’ and that photos will prompt discussion

Local Liberal candidate says ad showing him with Abbotsford police officer was ‘not acceptable’

Jati Sidhu said advertisement only appeared for 30 minutes and was created by Montreal company

Cache Creek councillor has committee appointments rescinded

Council also presented with need for roof repairs to Cache Creek fire hall

RCMP conclude investigation into 2017 Elephant Hill wildfire

Files have been turned over to BC Prosecution Service

VIDEO: ‘Thrones,’ ‘Fleabag’ top Emmys

Billy Porter makes history as first openly gay black man to win best drama-series acting Emmy

B.C. students empowered to ‘shift the vote’ this election

B.C. Federation of Students launches ‘Our Time is Now’ campaign

Justice rules B.C. man gave statement of own free will

Defence wanted Vernon’s Curtis Sagmoen’s video interview with police deemed inadmissible

MEC and LUSH stores to close on Friday for global climate strikes

Retailers will be closed on Sept. 27 so that staff can march in demonstrations

Hybrid vessels part of B.C. Ferries’ plans to reduce emissions

Island Class vessels, coming by 2022, part of ferry corporation’s broader strategy

VIDEO: Grizzly bears fight along northern B.C. highway in rare footage

Cari McGillivray posted the head-turning video, shot near Stewart, B.C., to social media

Give severely addicted drug users injectable medical-grade heroin, guideline says

CMAJ article outlines best practices for innovative treatment that’s been lacking in overdose crisis

B.C. court hears disclosure arguments in Meng Wanzhou case

Huawei exec argues she was unlawfully detained at YVR last December at direction of U.S. authorities

Trudeau attacks Scheer, Harper, Ford in first federal salvo for Ontario

Liberal leader targets three big conservative rivals in second full week of campaign

Most Read