Capital budget can encourage larger debt—analysts

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With the upcoming announcements of annual budgets by provincial administrations across Canada, economic and policymaking experts warned the public of currently used accounting methods that, while not deceptive, can obscure the true scale of government debt—especially in its infrastructure projects.
In a commentary piece for the Financial Post, analysts Ben Eisen, Charles Lammam, and Hugh MacIntyre of the Fraser Institute said that a failure to differentiate between capital budget and operating budget on both the government’s and the public’s part can cause debt to balloon in the shadows.
The analysts noted that the term “deficit” often refers to the operating budget, which is the difference between the total of expenditures on day-to-day accountabilities and the revenue collected on an annual basis.
“But when a government borrows to pay for capital spending (building roads, schools, hospitals), it typically records only the annual interest payments and amortization expense in the operating budget. The capital budget is where the province borrows money to pay for its long-term infrastructure spending,” they wrote.
The Fraser Institute warned that while this staggers the infrastructure costs over several years, it can also mask the actual state of the government’s coffers at any given moment as the amount added to the debt would remain unknown for some time. As a result, government funds might be worse off than what’s readily apparent to the general public.
Eisen, Lammam, and MacIntyre cited the cases of Quebec and British Columbia, which are the only Canadian provinces that are looking forward to balanced budgets in 2016. In spite of the seemingly positive prognosis, though, Quebec is actually expecting debt to swell by $2.6 billion, while B.C. is looking at a $1.7 billion rise (despite $277 million in surplus left over from last year).
“Ultimately, governments can add more debt to their books for capital projects than from the operating deficit announced in the budget,” the analysts said.

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