Never cry wolf

Putting BC's debt into perspective
Author(s): 
March 1, 2000

The 2000 BC budget was accompanied by a great deal of howling over the size of the province's debt and deficit. The classic way of presenting this case is to list BIG numbers--$36.5 billion of debt, amounting to $9,000 per person, at a cost of $2.8 billion of interest costs this year. These numbers are definitely big, but when put into proper context, BC's fiscal environment is surprisingly strong.

First, much depends on which numbers you look at. The numbers cited above include the debt of Crown corporations that are self-sustaining. BC Hydro, for example, is a corporation that has its own revenue sources, and actually contributes money to government coffers each year. It holds debt, just like most private corporations, but that debt will be paid for out of the operations of the corporation, not by taxpayers.

Picking the biggest number overstates the amount of debt that taxpayers are on the hook for. A better figure is "taxpayer-supported debt", which is $27.8 billion, with a lower debt service cost of $2 billion this year. These are still big numbers, but only until you consider the size of the total provincial economy, which in 2000 will be $119 billion. Just as the main constraint in financing a mortgage is a function of how much income you have, the same is true for government debt.

The appropriate measure of our debt is in relation to the total economy. According to budget projections, BC's debt-to-GDP ratio will hit 23.5% a year from now. It will be even less if the government comes in under budget, as is likely given prudent assumptions and the inclusion of a contingency reserve of $300 million on a projected deficit of $1.3 billion.

BC has the third lowest debt-to-GDP ratio in the country, and has among the highest credit ratings. In Mike Harris' Ontario, after much belt-tightening in recent years, the debt-to-GDP ratio is 30%, while Quebec's is close to 50%. Every other province except Manitoba and Alberta has numbers between Ontario and Quebec's.

Another way of looking at this is the actual cost of servicing debt. In 2000/01, BC will spend 8.3 cents of each revenue dollar in interest payments on accumulated debt. Again, this is quite low. The federal government spends 27 cents per revenue dollar on debt service. Most provinces spend between 13 and 18 cents.

The business community acknowledges this, but is mostly concerned about the trend of a rising debt-to-GDP ratio. True enough. If BC's debt were to rise to the levels seen in Quebec, this would indeed become a constraint on the ability of government to fund programs, as the "interest bite" consumed a greater share of revenues. But BC is not there yet--indeed, BC could run deficits for several more years before the amber light began to flash.

Ultimately, the key issue in terms of taking on new debt is what that debt is used for. If used to invest in infrastructure, basic scientific research, K-12 or university education, or health care facilities, these all provide a return on investment that justifies the original debt.

Much ado is also made of nine consecutive deficits run by the NDP. But we have to keep in mind that the 1990s were a tough decade for BC, due to many factors that cannot be pinned on the provincial government. We started the decade with a major economic downturn, which was made longer and deeper by high interest rate policies from the Bank of Canada in a zealous pursuit of zero inflation.

Mid-decade there was some recovery, but federal transfer payments to the provinces for health, education and social services were deeply cut, passing the federal deficit onto the provinces. BC, to its credit, chose not to slash health care and education, instead maintaining and even increasing funding levels.

Finally, BC was hit in 1997-98 by the twin blows of the Asian financial market collapse and low commodity prices for our exports. BC was hit worse than other provinces because it had stronger economic ties to Asia--prior to the Asian meltdown, BC produced 42% of Canada's exports to Asia. Fortunately, in the past year there has been recovery in Asia and in commodity prices.

The years of larger deficits have come during these storms, and overall have had a stimulative economic impact. If the government had run balanced budgets throughout the 1990s, British Columbians would have felt much more of the impact of these storms.

Of course, BC cannot run deficits forever. Over the medium-term we need to ensure that the debt-to-GDP ratio does not grow too large. But the numbers simply do not justify the howling.

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