B.C. ramps up spending and increases size of government

An era of sizable deficits and growing government appears to have returned with a vengeance in British Columbia. That’s the main message of the 2023 budget recently tabled by Finance Minister Katrine Conroy. After several years of operating surpluses, punctuated by a temporary deficit amid the worst of the COVID-19 crisis in 2020-21, B.C. is now on track for a steady flow of red ink over the next three years (at least).

With government expenditures surging, revenues downshifting, and record levels of planned public-sector capital spending, B.C.’s net debt is about to increase sharply both in absolute terms and as a share of GDP. According to the budget, the net debt will hit 23 per cent of GDP by mid-decade, up almost 10 percentage points from 2018-2019. With borrowing more expensive in a higher interest rate environment, a larger government debt will translate into fast-rising annual debt-servicing costs over the rest of the decade.

Since taking office last November, Premier David Eby has been at pains to show that he’s prepared to open the spending taps in a bid to tackle some of B.C.’s toughest problems—unaffordable housing, rising crime and widespread public disorder, and a creaking if not crumbling health-care system. The result is many billions of additional taxpayer dollars allocated to these high-profile policy areas.

Government spending has been on something of a tear since 2019 and is on course to reach $85 billion by 2025-26. In 2019-20, B.C. government outlays stood at $59 billion, meaning spending will have jumped by more than 40 per cent in a little more than half a decade. On average, the levels of program spending outlined in the new three-year fiscal plan are 10 per cent higher than the government projected a year ago. To be sure, this partly reflects the impact of higher-than-anticipated inflation, which is pushing up public-sector compensation costs. But it also speaks to a political choice to expand the size and reach of government itself.

Elevated capital spending is another chapter in the growth-of-government story. Public-sector capital investment is pegged at $48.5 billion over the next three years, with about 80 per cent of that being taxpayer-supported (the remainder is capital spending undertaken by financially self-supporting Crown corporations).

While there are benefits to a refurbished and more up-to-date public-sector capital stock, a policy to dial up government investment carries financial and economic risk at a time when inflation is running well above the Bank of Canada’s 2 per cent target and the B.C. construction industry is operating at full capacity.

Of particular concern, many current government-mandated construction projects have faced large cost overruns, in part because of the government’s “community benefits agreement” (CBA) regime covering large public-sector projects. The CBA creates a set of contracting and procurement rules that favour certain unionized construction firms, thus reducing competition and raising taxpayer costs. It’s likely the recent pattern of project cost overruns will persist as the government hikes annual capital outlays by more than 60 per cent between 2021-22 and 2025-26.

Unfortunately, the government’s inclination to grow the public sector is not matched by a commensurate focus on bolstering the supply-side of the economy or boosting productivity. Budget 2023 contains little that will improve the business environment, induce companies or fund managers to direct additional investments to B.C., or prompt entrepreneurs to double down on B.C. opportunities. The province’s uncompetitive personal income tax rates remain in place, and there’s no hint of overhauling the antiquated and economically-damaging B.C. sales tax. The budget does pledge to reform the province’s carbon tax, which as now designed puts manufacturers and other energy-intensive industries at a distinct competitive disadvantage compared to similar industries in other North American jurisdictions. Details on what the revamped carbon-pricing system will look like are expected over the next few months.

Finally, the new budget suggests B.C. policymakers are behind the curve in a world of high inflation, overheating economies and escalating borrowing costs. An economy that’s already bumping up against capacity constraints isn’t one that obviously needs large dollops of additional government stimulus. More public-sector hiring threatens to add to the woes of private-sector organizations struggling to find workers. And with much higher interest rates, taking on more public debt is an expensive proposition compared to the situation in the last dozen years when money often seemed to be almost “free.”

The additional $41 billion in public-sector debt that B.C. intends to accumulate between now and 2025-26 will carry an increasingly hefty price tag and limit the ability of policymakers to respond to future economic shocks.