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Does BC really have a debt problem?

The Report: May / June 1999 vol.19 num.7

by MARC LEE

The recent provincial budget was, for many commentators, a real dog. After all,$890 million is an awfully big number for a late-1990s provincial deficit. But there isgood reason to step back and put the numbers in their proper context. Despite all of thebarking, the bite is not really that bad.

Though it may sound surprising, even with this years largedeficit, BC is still in relatively good fiscal shape. Economists generally assess theoverall debt level not in straight dollar terms, but in relation to the size of theeconomy. Like a household or a business, the bigger you are, the more debt you can hold.

This year will see a rise in BCs debt-to-GDP ratio to 24 percent, but this is still the third-lowest of all of the provinces. The federalgovernments debt-to-GDP is 65 per cent, almost three times as large. Among theprovinces, the recent Quebec budget predicts a debt-to-GDP ratio of just under 50 percent, while Ontario, after years of deep cuts, has a ratio of 30 per cent. Quebec may havea debt problem; BC has a ways to go before we are anywhere close.

What matters most, for any government, is the ability to pay off theinterest incurred on the debt. In the coming year, BC will pay 8.6 cents per dollar ofrevenue in interest payments. Only Alberta, Manitoba and BC have debt service costs inthis ballpark. The other seven provinces pay at least 13 cents per revenue dollar, withOntario at 17.7 cents and Nova Scotia at a whopping 19.1 cents.

Commentators are right to be concerned about future build-up of debt.Large increases in public debt ultimately lead to restrictions on the ability ofgovernments to pay for programs like health care and education.

But BC is nowhere near a "debt wall." Predictably, theprovinces credit rating was downgraded, but the evidence suggests that this willonly marginally increase the cost of borrowing.

Clearly, government cannot run large deficits year-in and year-out.This would not be sensible and would indeed lead us into severe debt problems. But for BC,now is the time to run a deficit, not a balanced budget that would exacerbate the existingeconomic downturn.

The best time to attack the overall debt is when the economy isgrowing. During an expansion, governments face increasing tax revenues and lower demandson expenditures. The last opportunity to do so came at a time of deep federal cuts toprovincial transfer payments. BC, unlike other provinces, chose to absorb the cuts tomaintain funding for health and education.

At the start of 1999, BCs economy is not expanding, largely dueto factors beyond our control: slumping Asian demand for our exports and depressedinternational commodity prices. When times are tough, it is simply good public policy tostimulate demand in the economy through fiscal measures.

Another consideration is what sources are driving the deficit. Thebiggest chunk of new spending comes in health care, an increase of $615 million.

Few would argue that this money is not needed. Opposition critics havechastised the government over health care issues, like waiting lists for surgeries. Thisyears budget targets money specifically for this purpose.

Another area is $45 million in new education spending. This is simply agood investment with a large payback. Estimates of the economic return for completingadditional schooling (through higher incomes to individuals, and hence, larger taxrevenues to government) range from 15 to 30 per cent ... not a bad return when thegovernment can borrow at five per cent.

The budget also placed an additional $100 million into a contingencyreserve fund to ensure that fiscal targets will be met. Prudence is in vogue, but it doesadd to estimates of the bottom line. With this cushion, the final deficit numbers may evencome in at less than estimated.

These are all political choices. Many commentators coveted the prize oftax cuts for big business and the wealthy in this years budget. This choice wouldhave provided a weaker fiscal stimulus, would also have led to a deficit outcome, andwould have increased inequality.

Increasing spending for health, education and capital projects at atime of economic downturn is a better choice. The province needs it and can afford it. Thecritics should stop their barking.

Marc Lee is Research Economist for the BC Office of the Canadian Centre for PolicyAlternatives.

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