By Charles Lammam
and Sean Speer
The Fraser Institute
VANCOUVER, BC, Sep 16, 2014/ 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
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