Estimating the recessionary impact on B.C. finances: Part 2
British Columbia’s economy is expected to shrink this year, which means a major blow to provincial finances. The Horgan government was already planning to increase provincial debt prior to the recession and the province’s fiscal challenges are only further exacerbated now. This blog post estimates how much net debt—total liabilities minus financial assets—the province will accumulate by the end of March 2021 due to lower than budgeted revenues and higher spending.
As mentioned in Part 1 of this blog series, the B.C. government has been accumulating debt despite running operating surpluses. Budget 2020 projected that net debt would grow from $37.7 billion in 2016/17 to $48.9 billion in 2020/21. Again, the province was expecting to accumulate debt because it separates annual spending (the operating budget) from long-term spending on items such as new schools and highways (the capital budget).
Provincial net debt (as a share of the economy) was also set to increase after a few years of decline, from 14.5 per cent in 2019/20 to 15.4 per cent in 2020/21. However, B.C. was still one of the least indebted provinces in Canada relative to the size of its provincial economy, as Alberta was the only province with a lower debt-to-GDP ratio.
But the COVID-related recession means B.C. is now set to accumulate more debt this year than previously anticipated. Moreover, a shrinking economy and additional debt means the province will see an increase in its debt-to-GDP ratio in 2020/21.
In Part 1 of this blog series, we used two different methods to forecast what the operating deficit might look like this year. The first scenario analyzed the drop in revenue experienced during the 2008-09 recession whereas the second scenario used national revenue projections from the Parliamentary Budget Officer (PBO). The estimated deficits under these circumstances were $6.9 billion and $8.8 billion, respectively.
In both approaches, we can calculate nominal net debt in 2020/21 if we assume that the province will maintain the same capital spending plan from the spring budget. B.C.’s net debt is expected to increase from $44.5 billion in 2019/20 to $56.0 billion in 2020/21 using the first approach whereas it rises to $57.9 billion under the second approach. In other words, provincial net debt could climb between 25.8 per cent and 30.1 per cent this year.
At the same time, the provincial economy is expected to contract. CIBC Economics, for instance, forecasts a 4.7 per cent nominal decline in the province’s GDP. Put differently, the B.C. economy could shrink by approximately $14.4 billion this year.
These projections mean that the province’s debt-to-GDP ratio will increase to between 19.2 per cent and 19.8 per cent, depending on the approach used. Moreover, these estimates are approximately four percentage points higher than the government anticipated in its 2020 Budget. For historical context, even the lower debt-to-GDP ratio of 19.2 per cent would be tied for the highest ratio in B.C. over the last four decades.
Although B.C. is one of the least indebted provinces in Canada, its debt is growing at a worrying pace and the province must address its fiscal challenges sooner rather than later. Additional debt will leave a lasting mark on provincial finances and result in higher interest payments and fewer resources for important priorities such as health care, education and tax relief.
Of course, the B.C. government is not currently in a position to immediately deal with this issue. But it must recognize the magnitude of the fiscal challenges it faces in the medium- and long-term, and develop a credible plan to swiftly quell debt accumulation once the crisis passes. Otherwise, this will be a problem that burdens British Columbians for decades to come.
Subscribe to the Fraser Institute
Get the latest news from the Fraser Institute on the latest research studies, news and events.