Canadian Centre for Policy Alternatives
Almost every year at budget time, BC governments of all stripes predict public coffers will be worse off than they’re likely truly expecting.
This habit is usually portrayed as harmless or even prudent, but when the budget room available to us is underestimated it creates a bias against public investment, especially in much-needed social programs. This damages BC’s economic well-being in the long term.
Consider 2018: on budget day, the government projected a year-end surplus of $669 million. But at the end of the fiscal year they booked a surplus of over $1.5 billion. In past years, the previous provincial government repeatedly used the same inaccurate practice, underestimating fiscal resources available often by hundreds of millions or billions of dollars.
These consistent underestimates result from various forms of “fiscal padding” that are incorporated into the BC budget: forecast allowances, contingency funds, as well as the practice of assuming economic growth rates are lower than those projected by economists.
Naturally, unexpected events will arise over the course of a budget year and revenues and expenditures will always fluctuate around the fiscal plan. But these fluctuations tend to cancel each other out within individual budget years—and certainly in the long-run.
When budgets downplay our real fiscal position, ‘surprise’ year-end surpluses are used to pay down debt rather than budgeted for much-needed additional investments in areas like housing, child care, public transit, climate action and poverty reduction.
But interest rates are at historic lows, so $1 billion put towards critical public investments will almost certainly pay off better in economic terms than a reduction in debt. Indeed, a dollar of investment in areas such as public transit and child care has a greater pay off than a dollar in added economic output. When we prioritize low-return debt reduction over high-return public investment, we are essentially flushing money down the toilet.
So why has budgeting for ‘a surplus at all costs’ become the norm? Decades of ideology have pushed the idea of austerity and small government. Plus large deficits under high interest rates in the 1980s helped entrench an assumption—at least among political elites and pundits—that avoiding any deficit is important. But there’s no meaningful economic difference between a small surplus and a small deficit. Any serious macroeconomist will tell you this.
At the federal level, we finally seem to have gotten over the surplus fixation. Since 2015, Canada has run modest but sustainable federal deficits without increasing the debt-to-GDP ratio. The sky hasn’t fallen, the federal government’s credit rating hasn’t been downgraded and most voters don’t seem to mind.
To be clear, deficits are not the only or necessarily best way to increase public investment in important areas. We can increase public investment in this province by taxing the rich and corporations. Even notorious fiscal hawks like the credit rating agencies say there is room to raise additional revenue in BC, as Moody’s and DBRS note in their most recent reports.
But in the absence of additional revenue, we still should make full use of the fiscal room we have. As a province we need to ask ourselves: do we want a surplus at all costs? Or do we want to make the high-return public investments necessary to meet the big challenges we face?
Alex Hemingway is an economist and public finance analyst at the Canadian Centre for Policy Alternatives BC Office.