By Casey Vander Ploeg
In the Vancouver Sun
Feb. 26, 2013
The lead-up to the 2013 provincial budget tabled in the British Columbia legislature earlier this week was more intense than usual, and for good reason. There’s been a lot of speculation about whether the Clark government would meet its goal of balancing the books, and even more guessing about what the budget might highlight for voters as they head to the polls on the 14th of May.
When it comes to budgets, politicians, the media and the public tend to focus on a single number—the budget balance—and whether that number is positive (a surplus) or negative (a deficit). After all, that’s the bottom-line, right? The BC budget predicts a $197 million surplus. It’s right there on page one. Enough said.
I’m afraid not.
First, the budget balance is only one fiscal metric, and it’s not even the most important one. A better measure of the financial “bottom-line” is found in the appendix to the budget on page 138. There, the province presents the anticipated change in its net financial asset position as a result of the budget—what BC calls “net liabilities” and other provinces call “net debt.”
A province’s net financial asset position loosely corresponds to the concept of personal net worth—total financial assets less total financial liabilities. It’s money the province owns less money that it owes. It’s akin to your bank accounts and RRSPs minus your mortgage, credit card balances, and car loan.
When viewing a budget strictly from a numbers perspective, the better measure of the “bottom-line” is whether the net financial asset position of the province is improving or deteriorating.
The fact is the 2013 BC budget is reporting a $197 million surplus at the same time that the province’s net financial asset position is expected to worsen by $1.5 billion. In other provinces, this would be defined as $1.5 billion more in “net debt” and it clearly shows the folly of fixating on the surplus-deficit figure.
So, how can a $197 million surplus translate into a billion plus increase in “net debt” for BC?
The reason is that like virtually every other province in Canada, BC does not include in expenditures the full value of investments in infrastructure in the year when they take place. Rather, it is spread out over future years. As investment in public capital provides long-term benefits, accounting rules allow for this approach.
First, at the end of the fiscal day, the province of BC is short $1.5 billion if its spending and investment plans for the year are to be carried out. This money will have to be found by either dipping into savings or reserves (lowering financial assets) or issuing new debt (increasing financial liabilities).
Second, it’s important to set any change in net financial assets against economic growth. In 2008, just before the onset of the recession, BC’s net debt-to-GDP ratio was 12.1%. This budget will see the ratio rise to 17.3% next year, but then begin falling to 16.5% two years later. Given the fiscal nightmare facing other provinces in Canada and elsewhere around the globe, this actually isn’t too bad.
Third, a lot of us—myself included—are sometimes too inclined to measure the success of a budget based on what’s happening with deficits, debt, and even net financial assets. As important as that is, the strength or weakness of any budget as a policy document lies well beyond the balance sheet. What is the province spending its money on? Are these the right priorities? Does the budget better position the province for long-term economic success?
In BC, the 2013 budget will see the province doing some more borrowing. However, that is largely driven by investments in infrastructure. If the projects are strategic and will enhance economic productivity and performance, borrowing could be a very good thing.
Casey Vander Ploeg is a Senior Policy Analyst at the Canada West Foundation. Canada West Foundation is the only think tank dedicated to being the objective, nonpartisan voice for issues of vital concern to Western Canadians.