Assessing BC’s fiscal health: unpacking the spin on BC’s deficits, debt and spending

May 9, 2013

As happens in elections, the claims and accusations are flying about “who is the better fiscal manager.” The Liberals created a “Spend-O-Meter” purporting to show the NDP’s spendthrift ways. The NDP responded with a “Debt-O-Meter” showing how the Liberals have racked up the provincial debt in their time in office. And while these gimmicks may make for entertaining politics, they oversimplify and often misrepresent the real issues.

Time for a reality check on BC’s deficits, debt and spending.

In fact, neither the NDP nor the Liberals were big spenders when in government. BC’s public accounts show that government spending measured as a share of the economy (GDP) declined in both the 1990s and the 2000s, and is now at levels significantly lower than the 1980s.

More importantly, neither party has presented platforms that would change that. The spending proposals of the NDP and the Liberal platforms are strikingly similar when expressed as a share of GDP. Both represent a decline in the size of government from the current 19.4%. The Liberals are proposing a decline to 17.9% in 2015, while the NDP would see spending go to 18.3% of GDP — a difference of less than half a percentage point.

The Liberals have made much of the NDP’s election spending platform being “unaffordable,” but the reality is that the $2 billion of proposed extra spending is over three years and only amounts to a 1.5% increase over the spending plan outlined in the Liberal government’s February Budget — hardly something to write home about.

As for the deficit, there is no compelling economic reason why BC cannot run a few years of modest deficits. Indeed, whoever wins the May election would have to run a deficit, unless they intend to deeply cut services —  that’s the legacy of tax cuts that have deprived the public treasury of revenues needed to adequately fund our public services.

BC’s overall fiscal situation is manageable. In the fiscal year that just ended, BC had a deficit of $1.2 billion and taxpayer-supported debt of $38 billion, which is projected to go up to $42.5 billion this year. These are big numbers, but government budget figures always are. And they can be a bit distracting. Because what really matters isn’t the absolute size of these numbers, but rather, their relative size compared to our ability to pay.

That’s why economists aren’t particularly interested in a government’s deficit or debt, bur rather, in the debt relative to the size of the economy (the debt-to-GDP ratio) and debt service costs (meaning, debt interest payments relative to the size of the budget). These are the figures we need to look at to get a meaningful picture of a government’s fiscal health.

It also matters what governments do with the borrowed money. If debts are accumulated to improve the health of a society, to invest in education, to protect the environment, or to build needed infrastructure, then they should be seen as wise investments. That’s because these are all forms of spending that enhance our long-term productivity — they allow us to create more wealth in coming decades. Indeed, if a society fails to make such investments, it risks becoming much poorer over time.

With that in mind, BC’s fiscal position starts to look quite manageable. Our debt-to-GDP ratio is about 18% for 2013/14. It’s not an historic high, and, in fact, it’s the envy of most other places, and has been for over two decades. BC’s debt-to-GDP ratio is the third lowest in Canada, and Canada’s debt-to-GDP ratio is, in turn, the lowest among G7 countries.

We can comfortably afford to run modest deficits for a number of years without fear of becoming like Greece (where the debt-to-GDP ratio is about 180%).

Though much of the debate is focused on deficits and how they contribute to government debt, the recent increases in provincial debt have been driven much more by capital spending on roads, bridges and hospitals than by annual budget deficits. For example, while last year’s deficit was $1.2 billion, taxpayer-supported capital spending totaled $3.7 billion, as has been the trend for many years.

BC spends about 4 cents for every dollar of government revenues on debt interest payments, an entirely manageable debt cost. (If most of us were only spending 4% of our personal incomes on debt interest, we’d be pretty happy!) Indeed, given the current environment of low interest rates, now is an ideal time for the government to borrow in order to invest in improving the economic security and future productivity of British Columbians, and building a province we can all be proud of.

Seth Klein is the BC Director of the Canadian Centre for Policy Alternatives, and Iglika Ivanova is an economist with the CCPA-BC.