British Columbia is in a unique fiscal position. The province’s debt is small. Its credit rating is sterling. The budget is in surplus, and has been since 2013. The Conference Board expects B.C.’s economic growth will lead Canada this year, by a wide margin, after solid advances over the past decade.
And long-term borrowing costs are exceptionally low.
All of which, less than a year-and-a-half before the next election, presents the governing New Democratic Party, and the province, with an interesting opportunity.
The government has the fiscal room to be more ambitious while remaining fiscally prudent. It can spend more, in at least one part of the budget, while remaining in the black.
The opportunity is in one-off infrastructure spending. The province can’t significantly increase annual program spending without throwing the operating budget into deficit – at least not without a tax increase, or an unexpected resource-royalty windfall. But due to the way infrastructure investment is accounted for, Victoria does have room to increase its capital spending without incurring an operating deficit.
It’s a course the NDP government is, to some extent, already pursuing. While maintaining a balanced budget, last February’s provincial budget outlined $20-billion of taxpayer-backed capital spending over three years. The money is for schools, health care, roads and public transit – infrastructure that a growing province needs.
As a result of that new infrastructure spending, the government says B.C.’s debt will be $54-billion in 2022, up from $44-billion last year. However, that extra debt is supported by a growing tax base. (B.C.'s economy is already close to a third larger than it was five years ago.) As a result, the province expects its debt-to-GDP ratio to grow only slightly, from 14.6 per cent this year to 16.1 per cent in 2021-22.
By comparison, Quebec and Ontario both have debt-to-GDP ratios around 40 per cent, and the federal government, at just more than 30 per cent, is the toast of the G7.
B.C.'s debt is relatively light, even when compared with the province’s recent past. In 2014, the debt-to-GDP ratio was 17.9 per cent. What’s more, as the bond-rating agency DBRS noted last spring, “The province generally outperforms its budget forecasts, and its debt ratios are often lower than what are projected at the time of the budgets.”
Finance Minister Carole James’s 2019 budget expected the debt-to-GDP ratio to rise this year to 15 per cent from 14.9 per cent. By the fall fiscal update, however, that had been revised down to just 14.6 per cent. Last spring DBRS concluded that, even under the government’s capital plan, the debt-to-GDP ratio is likely to remain stable or increase only marginally over the next three years.
Therein lies B.C.'s fiscal wiggle room. Absent a tax increase, the province does not appear to have the cash to significantly boost program spending. But it can afford a significant increase in one-time, one-off infrastructure spending.
There is a broader rethinking of debt going on, among economists and voters alike. In this fall’s federal election, the Liberals, slayers of gargantuan deficits in the mid-1990s, proposed four more years in the red; the deficits are big enough to do important things, yet small enough to allow Ottawa’s low debt level to continue to decline. Olivier Blanchard, former chief economist at the International Monetary Fund, last year became the highest profile economist to advocate an expansion of debt in certain non-recessionary situations, namely when the true cost of that debt will be low, or nil.
Mr. Blanchard does not advise wild spending and nor do we. But if conditions are right, then governments may safely borrow more. One essential condition is nominal economic growth outpacing the nominal interest rate on the debt. The current global situation of extremely low long-term interest rates would appear to be one of those moments. B.C. these days is selling debt on 30-year terms at less than 3 per cent.
What infrastructure projects could B.C. consider? The province is offering enough money to build a half-length subway line along Broadway in Vancouver and is looking at a truncated SkyTrain in Surrey. Budgets total about $4.4-billion. An estimated additional $5-billion could get the full jobs done, delivering transit all the way to the University of British Columbia and to Langley.
B.C. appears to have the fiscal room to pay for this, and more, without going into deficit, and while keeping the debt-to-GDP ratio under 20 per cent.
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