B.C. government’s record-breaking deficit even worse than it appears

The Eby government plans to run a massive $7.9 billion budget deficit this fiscal year. This would be the largest deficit in provincial history and the largest deficit in Canada (relative to the size of each province’s economy).

And yet, the $7.9 billion official deficit number actually understates the government’s financial mismanagement this year. Indeed, a closer look shows that things are even worse than they appear.

For starters, the government’s accounting of its revenue (and therefore its overall budget balance) makes no distinction between tax revenue and non-renewable resource royalties (mainly from natural gas).

Why is this a problem?

Because non-renewable resource royalties are onetime revenues, depleted each year when the resources are extracted and sold. In other words, you can’t generate tax revenues from the same natural gas source more than once.

Rather than spend away these revenues each year, the government should save and invest them so they generate an ongoing stream of revenue in the form of interest on investments. Treating non-renewable resource revenue like other forms of taxes is akin to selling the family silver one year but spending as though you’ll be able to sell the silver every year. For perspective, if you exclude natural gas royalties from total revenue, the B.C. government’s $7.9 billion deficit jumps to $8.7 billion this fiscal year (2024/25). Clearly, the government is relying heavily on resource royalties to fund its spending.

Another problem is the government’s treatment of carbon tax revenue. When the B.C. government introduced its carbon tax, it promised the tax would never be a “tax grab” because it would be “revenue neutral”—that is, all the money raised from the tax would be used to reduce other taxes so the government would collect the same amount as before. This aligns with widely accepted best practises for carbon tax design.

The government dropped this commitment, however, starting in 2013/14, and in later years reversed several business and personal income tax reductions that had been designed to offset the carbon tax. In fact, the government went much further, raising some tax rates higher than they had been originally.

So, the carbon tax is no longer revenue neutral. Some of the money is returned to British Columbians through a tax credit to low- and middle-income residents, but not all of it. By holding onto some of the carbon tax revenue rather than returning it to taxpayers, the government is keeping the deficit smaller than it would be if the government adhered to best practises for a carbon tax. In fact, if the carbon tax were truly revenue neutral, the deficit would increase by hundreds of millions of dollars.

And that’s not all. The Eby government’s official deficit number for this fiscal year is only based on day-to-day operating expenses including salaries of government employees and interest payments on debt. The government excludes spending on longer-term capital projects such as highways and bridges even though they increase provincial debt.

This government uses this accounting approach because capital projects are assumed to provide benefits over the long term. However, once you factor in capital spending, B.C.’s debt (after accounting for financial assets) increases by $18.9 billion this year, more than twice the government’s official operating deficit.

The Eby government has entered uncharted waters, with historically large operating deficits. What’s more, it’s conveniently including non-renewable resource royalties in general revenues, and using carbon tax revenue that should be returned to British Columbians to prevent the official deficit from growing even larger.

The government’s official deficit looks bad. When you take a closer look, things go from bad to much, much worse.