There are lies, damned lies, and Provincial debt statistics: Provincial debt grew under both the BC NDP and the BC Liberals

* This is the final segment of a four part analysis of BC’s economic performance under the BC NDP government(s) in the 90s and the BC Liberals government(s) since. The summary page can be read here. 

 

Despite looking hard for evidence the BC NDP mismanaged the economy in the 1990s, none of the variables I’ve considered in other posts–GDP/GDP per capita growth, various labour market indicators, and income inequality–show any notable difference in performance during the respective time the BC NDP and the BC Liberals spent in government. Perhaps, though, governments can’t really do all that much to influence these things (frankly, I’m inclined to at least partly agree with that notion).

Debt is different, at least according to some people. Each year, the story goes, governments choose policies that determine spending commitments and taxes according to their ideologies (and, occasionally, according to good or bad economic advice), and then the economy reacts and works and ultimately leaves the government with some difference between the tax revenues they collect and the money they’ve spent. If the difference is positive, it’s a’ surplus’; if negative, a ‘deficit’. Debt is the accumulated amount of surpluses and deficits ever incurred.

Digging through old reports on the Province’s accounts felt like digging through this pleasantry which was left in the UC Davis bathrooms

This way of evaluating government economic performance explains why the idea of a ‘balanced budget’ is so important to many governments: it is often regarded by the public as a mark of fiscal responsibility. And I’m somewhat sympathetic to the idea, at least over the long-run–but that admission comes with a big caveat: most of us know so little about accounting that we are easily and often misled by government budgets dressed up to impress us.

A Minister of Finance can walk in front of the cameras on budget day and declare there is a surplus that will be used to reduce the debt, even as the budget he presents contains plans to increase the total debt

I am trained as an economist, not an accountant. Digging through old Provincial budgets and annual reports from various crown corporations, such as BC Hydro and ICBC (Googling older reports than are listed on those pages sometimes yields what you’re looking for, if you’re interested), is not only tedious; it can be frustratingly confusing. These financial reports are opaque, which is why most of us generally trust the media to let us know what’s being said by Office of the Auditor General and ratings agencies like Moody’s.

Unfortunately, whether it’s because we aren’t paying attention to the right media or because even these oversight organizations sometimes fail us (the ratings agencies were, after all, partially responsible for the global financial crisis of 2008), we are still often easily misled. And while we would hope the accounting practices used to report public accounts would be in line with standard accounting procedures that are understood by investment professionals, not only are the vast majority of tax-paying voters not investment professionals, but many of those accounting practices used by BC governments of all parties (and almost every year of BC Liberal government) have been slammed as misleading and substandard*. How is a regular voter supposed to gauge whether a government has been fiscally prudent?

If a government highlights its performance on one metric, we could be forgiven for taking it as an indication of good fiscal management. Take, for example (and forgive these technical terms*) the Provincial ‘operating budget’. This is what the BC Liberal government is referring to every time it talks about running a ‘balanced budget’, and it is essentially supposed to inform us of the surplus or deficit projected after considering revenues and the day-to-day costs of the government like electricity, wages for public servants, and interest payments on debt.

BC Liberal Minister of Finance Mike de Jong has delivered five ‘balanced budgets’ in a row, but the some of the numbers belong in that toilet (above)

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Going into debt to buy your house and car may have been a good investment for you, so the debt isn’t necessarily bad. But if you then re-mortgaged your house to pay for a vacation, you couldn’t plausibly say you had balanced your budget

 

The problem with focusing on the operating budget (apart from the fact that the government’s shady accounting practices have drawn repeated rebukes from multiple Auditors General for being so misleading as to render it almost meaningless) is that it actually doesn’t tell voters anything about whether the budget actually increases the Provincial debt.

That is, a Minister of Finance can walk in front of the cameras on budget day, declare he is presenting a “balanced budget”, and even declare there is a surplus that will be used to reduce the debt, all while the budget actually contains plans to increase the total debt. BC’s Minister of Finance Mike de Jong has, in fact, done exactly this in each of the past five years.

He is able to do this because the operating budget doesn’t consider the cost of capital expenditures on things like highways and schools; nor does it consider the accounts of government-owned Crown corporations like BC Hydro and ICBC. There’s nothing wrong with building infrastructure (in fact, it’s an important part of competently running the economy), and often borrowing to help pay for it is fiscally responsible. The problem is that most people tend to think that that sort of borrowing is being considered when governments talk about ‘balancing the budget’. But it’s not.

Finance ministers traditionally wear a new pair of shoes on budget day. They deserve this old pair of mine given how they mislead the public with respect to the actual level of debt for which the Province is liable

Taxpayers are ultimately on the hook for debt incurred by these publicly-owned entities, one way or another. The amount BC Hydro owes has increased by $11 billion under the BC Liberals, to $18 billion

If these were your own finances, essentially your operating debt would be what you owed on your credit cards after accounting for your bank account balance. Your capital debt would be how much you owed on your car and your house, if you owned them. Going into debt to buy your house and car may have been a good investment for you, so the debt isn’t necessarily bad. But if you had to re-mortgage your house to get cash to pay for a vacation, the accounting for everything would start getting muddled. You couldn’t plausibly say you lived within your means–or that you had ‘balanced your budget’ if you had to borrow against the value of your house to pay for your living expenses.

It gets muddled in the same way the Provincial accounts. Governments use ‘capital budgeting’ to align the apparent costs of expensive projects with the estimated benefits they will yield over time, because that debt has actually been used to purchase valuable assets (highways are to an economy as a car is to an individual), and because recording the entire cost of building a pricey highway all in one year doesn’t look good to voters. But while it may be good practice for conducting cost-benefit analyses of capital projects, it is misleading to talk to the public about Provincial finances in this way if the public doesn’t understand what’s being said (the BC Liberals have even drawn flak from the conservative Fraser Institute for emphasizing the balances of the operating budgets).

Emphasizing operating budgets isn’t the only problem with the way BC governments discuss Provincial debt. They also do not classify debt from rate-charging Crown corporations, such as BC Hydro, as ‘taxpayer-supported debt’ because those organizations can in theory raise rates on users, if needed, to help pay their debts. The implication is that taxpayers are not responsible for this debt. Again, this is misleading.

Taxpayers are ultimately on the hook for debt incurred by these publicly-owned entities, one way or another. When downgrading their outlook on BC Hydro’s creditworthiness in 2012, Moody’s noted a “…very high probability of extraordinary support reflecting the Province’s explicit and unconditional guarantee of BCH’s debt. We view BCH as an arm of the provincial government.” In their most recent credit report for the Province, Moody’s noted,

Moody’s has cautioned about the size of BC Hydro’s debt, and notes that the Province is ultimately liable for it

“BC Hydro’s total reported debt has risen considerably since 2008… The anticipated increase in debt continues to pressure the province’s rating since it raises the contingent liability of British Columbia.

BC Hydro has flexibility to increase utility rates to ensure that its own revenues will continue to support its operations and debt payments. However, once adjusting net income to take into consideration the extensive use of largely debt financed regulatory asset accounts, BC Hydro posts some metrics that are among the weakest of Canadian provincial utilities… While we do not expect to alter our medium-term view that this debt is self-supporting, we note that should BC Hydro’s financial position deteriorate, the possibility that it would require some support from the province will increase.” 

So the only reason the credit agencies don’t consider the debt of rate-charging Crown corporations when rating the Province’s creditworthiness is that those corporations can in theory raise rates for users (who are nearly all taxpaying voters and owners of the corporations). Either way, voters will pay.

It may seem reasonable that users, rather than all taxpayers, should pay for the debt incurred by Crown corporations like BCH and ICBC that provide demand-based services to users. The problem with that reasoning is two-fold.

The first part of the problem is that the government has been helping itself to large dividends from BC Hydro for decades (under the BC NDP the Province also received large dividends from BC Hydro). Ordinarily this would be a good thing: a financially healthy Provincially-owned company returning profits to its taxpayer-owners. But, as Moody’s noted above, BCH is not financially healthy. In 2001, the year the BC NDP left office, BCH’s long-term debt including liabilities was under $7 billion, with a debt-equity ratio of 70:30. Today that same debt figure stands at $18 billion, with a debt-equity ratio of 80:20.

The BCUC, a regulator, has been undermined and ignored by the BC Liberals

To pay for unaffordable dividends that helped subsidize past general spending and tax cuts by the government, future BC Hydro customers will be paying for the low-rate subsidies that were given to past users in an effort to keep them happy when voting

While it’s true that some of that is the result of capital investment (upgrading and building new infrastructure), BCH has also been forced to borrow to pay dividends to the Province despite being unable to afford them, made possible by the shady use of another accounting practice slammed by yet another Auditor General. So those rate increases won’t just be covering the cost of electricity generation and infrastructure, but will be helping to pay for dividends the government took from BC Hydro to help ‘balance’ the operating budget.

An additional problem with the idea that it’s fair to pay for BCH’s debt through future rate increases is that, despite how it may seem when you open your Hydro bill, rates have been capped at artificially low levels for years for political reasons. Voters don’t like rate increases, especially close to elections. The BC Utilities Commission used to have the authority to set rates, but the BC Liberals relieved them of that burden in 2012* after BCUC rejected a proposed rate increase as too low.

The upshot is that, in addition to paying for unaffordable dividends that helped subsidize past general spending and tax cuts by the government, future BCH customers will be paying rate well above the costs associated with generating their electricity in order to help pay for the low-rate subsidies that were given to past customers in an effort to keep them happy when voting. And BCH is by no means the only Crown corporation which has been treated in this manner* and whose debt will ultimately be payed by taxpayers, one way or another. Neither Powerex (BC Hydro’s energy trading arm) nor hoped-for revenues from LNG terminals that may or may not be built 10-20 years from now are going to cover that debt.

The BC NDP and the BC Liberals have both issued ‘fudge-it budgets’ which suggested better headline figures than were likely

Total Provincial debt was $20 billion in 1992, growing to $33.9 billion in 2001, and $66.7 billion last year. Total debt to GDP was 24.6% in 1992, 26.6% in 2001, and 25.5% last year

Oh, and one more thing: beyond the shady accounting tricks discussed above, annual operating balances (surpluses and deficits) are not really within the control of the government all that much, as governments are broadly legally bound to pay wages and keep staffing levels according to contracts already signed (as the Supreme Court recently informed the BC Liberals* after they ignored their contractual obligations to teachers in 2002, illegally saving hundreds of millions of dollars per year), and as tax revenues move broadly in line with economic growth (which, as discussed earlier, is largely out of the hands of any government, at least in the short-run).

All this to say that financial gymnastics are essentially all that have allowed governments from both parties to claim they ‘balanced the budget’ over the past decades (I note, again, that the BC NDP government of the 90s also engaged in shady “fudge-it budget*” estimates that allowed them to forecast two balanced operating budgets that later turned out to be in deficit. They also shifted some debt onto Crown corporations to make headline figures look better than they really were).

‘Surpluses’ and ‘deficits’, net debt-to-GDP ratios, and net debt per capita all fail to fully explain the debt situation of the Province. Nevertheless, I plot them (in nominal dollars).

I use data from the summary tables from RBC* (confirmed figures through fiscal year 2015-16) as I couldn’t find them through the CANSIM portal from Statistics Canada. I can’t quite piece together the RBC figures from looking at past Provincial Budgets and Debt Statistics reports, so I don’t take them as seriously as the other figures I’ve looked at. For ‘clarity’, those Provincial reports note, “Net debt is after deduction of sinking funds and unamortized discounts, and excludes accrued interest.”

Provincial and federal nominal budget balances, millions $. Sourced from RBC (April 2017)

Provincial and federal nominal net debt, millions $. Sourced from RBC (April 2017)

The operating balances tell us the BC Liberals have ‘balanced the budget’ much more often than did the BC NDP (only once). But as discussed above, these figures are essentially meaningless. The net debt figures suggest a slow, steady increase in BC’s nominal net debt, from $8.8 billion in 1991 (the year the BC NDP gained power), to $24.8 billion in 2001 (the year the BC Liberals gained power), to $39.6 billion today.

If you roll forward a year to account for the fact that new governments don’t introduce new budgets right away, and also consider inflation, the BC NDP looks a little worse. Most of the net debt growth under the BC NDP came sharply, in the 1997-98 fiscal year, while it’s grown more steadily under the BC Liberals since 2008. Most importantly, the Province’s debt levels generally looked good under both parties relative to the comparator jurisdictions (though the way these figures are reported across jurisdictions differs, and so they probably shouldn’t be compared. But as ‘they can’t really be compared’ is sort of the running mantra of this comparative analysis, I leave it for you to look at).

If we instead look at net debt per capita and as a proportion of GDP, we see broadly similar stories, though net debt per capita (per person in the province) grew under both parties. Both metrics show BC was in good shape under both parties, though the BC Liberals did broadly perform a little better on this front–if you take these figures to mean much.

Nominal net debt per capita, millions $. Sourced from RBC (April 2017)

Net debt to GDP. Sourced from RBC (April 2017)

Finally, I note that if you look at numbers from old budgets (1995-96 and 2002-03), you can find total Provincial debt and total debt to GDP for 1992 and 2001 (I can’t find the figures for 1991, the year the NDP were elected). The 2017-18 budget has the former but for some reason has stopped reporting the latter, though it is possible to back out their estimate of GDP ($261 billion, though this figure is not provided in Table 384-0038 from Statistics Canada) and use that to calculate total debt to GDP.

Total Provincial debt was $20 billion in 1992, growing to $33.9 billion in 2001, and $66.7 billion last year. Total debt to GDP was 24.6% in 1992, 26.6% in 2001, and 25.5% last year. Though these metrics don’t consider assets, they do reflect the amount of money the Province owes and will have to pay back. And it’s worth noting that it’s not as if the Province could just sell most of those assets without consequence to pay back the debt if they needed to. If you sell off a highway it’s new owners will charge fees to use it, so British Columbians will still be on the hook for the cost, one way or another.

In short, net debt ticked up during their the BC NDP’s time in government, but total debt has increased much more under the BC Liberals. The neither party saw debt to balloon relative to GDP, and the Province appears to have been in sound fiscal shape during both parties’ time in office.

The Province’s credit rating has improved during the BC Liberals’ time in office, but it was never bad: in 2001, months before the BC NDP lost the election to the BC Liberals, Moody’s affirmed the Province’s debt was a high-grade investment while noting “… the province’s favorable debt burden which remains relatively low by international standards…” In fact, that year the agency lauded the economic situation of the all the western provinces, but cautioned them* about allowing Crown corporation debt to grow. This worrisome Crown corporation debt growth has happened in BC under the BC Liberals, which now makes Moody’s cautious about BC’s total debt load–which has doubled during the BC Liberals’ time in office. Overall, neither party’s debt record impresses more than that of the other.

Time to step back, breathe, and stop thinking one party is more irresponsible than the other (Spanish Banks Beach Park, Vancouver)

Summarizing

Relative to other Canadian jurisdictions including the country as a whole over the same period, British Columbia performed well under both the BC NDP in the 1990s and under the BC Liberals since. Both parties faced good times and difficult times beyond their control, and both were at times guilty of scandals, mismanagement, and using shady accounting practices, but overall they were both sound economic stewards of the Province. Under both parties the economy grew, wages grew, and debt grew, though pretty evenly relative to other jurisdictions. Income inequality was generally lower but grew slightly under the BC NDP, while it was generally higher but fell very slightly slightly under the BC Liberals–at least through 2015. This doesn’t consider how inequality has been affected as a result of rising home values, though, so we can’t really say too much.

The fiscal health of some Crown corporations is slightly alarming, and either the rates they charge must rise sharply over the next few years or they will require large cash infusions from the Province to help nurse them back to health. Beyond that, it’s all speculation.

My reason for doing this research and writing this up was to provide an objective look at whether it’s true that the BC NDP mismanaged the BC economy when they were in government from 1991-2001. I found no evidence that they did. Sometimes memories fail us. Thankfully, we have data.

Thanks for reading.