BC Pulls Off a Small Surplus in 2008/09

The BC Public Accounts for 2008/09 fiscal year were released yesterday, showing that the province posted a surplus of $78 million or $28 million higher than projected in the 2008 Budget. Oh, phew, now we don’t have to worry about cabinet ministers facing the fines associated with a budget deficit under the Liberals’ balanced budget legislation (which was amended earlier this year to allow deficits, but only for 2009/10 and 2010/11).

It should be noted that the auditor-general raised several “reservations” about the application of accounting principles, as was the case last year. This time, the cumulative impact of these reservations was slightly bigger – it amounted to a decrease of $70 million to the provincial surplus compared to $59 million last year, as Vaughn Palmer pointed out here. However, even if those objections were taken into account, the budget balance would remain in the black by the narrow margin on $8 million.

While most of the media coverage I saw focuses on the implications of the recession on the size of the 2009/10 budget deficit, revised numbers for which are to be released on September 1, it is worth looking deeper into the books to find out how it was possible to spend more and still exceed the 2008 Budget surplus estimate despite the largely unforeseen recession which descended upon BC in the second half of the fiscal year.

Yes, provincial revenues in 2008/09 were $1.5 billion or 4% lower than the previous fiscal year, but this is not “due to the broad-based economic downturn” despite what the Ministry of Finance’s press release suggests. Note that the actual government revenues were only $162 million lower than what the province expected to collect in the February 2008 Budget when the economy was still thriving and the boom was projected to continue for the foreseeable future. If they were not budgeting for the swift and largely unforeseen economic downturn that hit BC, how come their projected revenues were almost spot-on?

Two reasons. Lower tax revenues than 2007/08 are partly  “the result of the accelerated tax reductions associated with the Province’s carbon tax announced last fall” as you’ll find out if you read further on in the Ministry’s press release (although very few of the media reports I saw picked up on this important point). On top of that, the 2008 Budget had substantially low-balled the expected revenues, which, as Marc points out, has been a common practice over the past few years.

On the expenditure side, the Public Accounts reveal that the government spent $560 million more than budgeted in February 2008. This is hardly a big reason for concern, given the current economic climate. Curiously, despite the increases in welfare caseloads during the second half of the fiscal year, social services expenditure was $17 million lower than projected in the 2008 Budget. To the government’s credit, health and education expenditures were slightly higher than anticipated in the Budget despite the fiscal pressures. At the end of the day, it’s likely the low-balling of revenues that allowed the province to avoid a deficit this time around.

In the meantime, the provincial debt continued to rise, increasing by $3,377 during the fiscal year after an increase of $1,194 in 2007/08. This should remind us that looking at the operating budget surplus or deficit reveals only a part of the picture. Posting a budget surplus while government debt is growing is made possible by modern accounting rules, which count capital expenditures (including buildings, hospitals and other infrastructure) in a different account. Reflecting the lifetime of major assets, investments in this capital account are expensed over a few decades in the operating account (which reflects current expenditures on salaries, supplies and general purchases). While most media coverage focuses on the “balance” in the operating budgets, what really matters for the long-term health of provincial finances is the public debt and its size relative to GDP, which is still one of the lowest in Canada.