Can BC Afford More Deficits? Yes, easily. And given previous tax cuts, there’s really no choice.

Iglika Ivanova and Seth Klein,

OK, time for a reality check on B.C.’s deficits.

Simply put, while arguments about deficits and “who is the better fiscal manager” may make for entertaining politics, there is no compelling economic reason why B.C. cannot run a few years of modest deficits. And in the absence of deep cuts to services, whoever wins the May election would have to run a deficit — that’s the legacy of tax cuts that have deprived the public treasury of revenues needed to adequately fund our public services.

Understanding the difference between deficit and debt

First, a bit of economic literacy: understanding the difference between “deficits” and “debt.”

A deficit (or conversely a surplus) is the difference between what a government collects in revenues and what it spends on its operations in a given year (capital spending, that is to say infrastructure investment in building schools, hospitals, bridges etc., is typically not included in the operating accounts and does not add to the deficit). Government debt, on the other hand, is the accumulation of annual deficits, plus capital spending on infrastructure projects, plus interest payments on previously incurred debt. For example, in the fiscal year that just ended, B.C. is forecast to have had a deficit of $1.2 billion (a finalized figure will be known in a few months). But provincial taxpayer-supported debt is forecast to be $38 billion for the year that just ended, and $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. Meaning, how do these numbers compare to our ability to pay? For example, if one considers this in personal or household terms, what matters isn’t the actual amount of dollars that someone’s debt is, but rather how that debt compares with their income, and secondarily, whether those debts were accumulated for good reasons — were they wise investments?

That’s why economists (and bond-rating agencies) aren’t particularly interested in a government’s deficit or debt, bur rather, in the debt-to-GDP ratio (meaning, the debt relative to the annual income of the economy) or in 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. They capture whether a debt is comfortably manageable, or conversely, alert us if the debt becomes problematic.

And if debts are accumulated to improve the health of a society, to invest in education, to protect the environment and sustainably manage shared resource assets, or to build needed infrastructure that will be in use for many years to come, then they should rightly be seen as wise investments. That’s because these are all forms of spending that enhance the long-term productivity of a society — they allow us to create more wealth in coming decades.

Indeed, if a society fails to make such investments, it risks being much poorer over time. That’s why investing in things such as poverty reduction, child care and early childhood education, more specialist teachers in the K-12 system, post-secondary education, environmental stewardship and climate action makes good public policy. Failing to make these investments today is a false economy — it makes the books look good today, but it sets us up on a path of lower productivity, increased social ills and higher total costs over the long run.

BC’s debt level is manageable

So, having clarified those concepts, what is the B.C. situation?

In short, B.C.’s fiscal position is quite manageable. And we can comfortably afford to run modest deficits for a number of years….

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