Fiscal policy continuity in 2018 Yukon budget

Get ready for a big wave of debt

After last year’s recommendations by the financial advisory panel, Yukon budget cognoscenti were eagerly awaiting the new territorial budget which came down last week.

In particular, I was curious to see what choices the government was going to make about our cash deficit and whether the Yukon’s net financial assets — our rainy day fund, so to speak — would go negative. A few years ago, it was over $200 million and made the Yukon one of the few provinces or territories without the equivalent of a “national debt.”

The Pasloski government burned a big chunk of this cash in the year or two before the last election. In fiscal 2016, their last (partial) year of government, the burn rate was $65 million. The new Liberal government continued the trend in the current fiscal year with a cash burn expected to be $58 million.

The new budget slows the burn rate somewhat to $51 million in the coming fiscal year. However, this will burn through our remaining cash and will push the territory’s net financial assets into red territory at -$21 million.

That’s a debt in common parlance, although by gaming the timing between cheques arriving from Ottawa and writing its own cheques the government may not need to borrow that exact figure.

Governments and media headlines often focus on whether the budget is officially in “surplus” or “deficit” in accrual accounting terms. But this is only a small part of the story.

Take the current fiscal year, the first full year of the new Liberal government. The accrual accounting surplus is $6 million. But at the same time they had to take $58 million out of the rainy day fund.

How do you have a surplus of $6 million while burning $58 million in cash?

It’s because in accrual accounting you only charge a part of big capital projects to the budget each year, since the buildings or roads in question last for many years.

It’s kind of like doing a $10,000 renovation to your kitchen, then telling your spouse it only cost $1,000 this year because you won’t have to renovate for 10 years. While that’s not untrue in an accounting sense, you still had to take $10,000 out of your retirement fund or put it on your credit card.

Some government accounting experts I have spoken to in recent years have expressed concerns about this divergence. It’s not just a Yukon issue, but our government in 2016 provides a handy example.

As reported in the News that year, the Pasloski government decided it would own and operate Dawson City’s troubled sewage plant instead of transferring it to the City of Dawson (largely because Dawson didn’t want to own it). This often-malfunctioning plant is a $25 million “asset.” As reported at the time, keeping it on the Yukon government books “transforms what would have been a $12-million deficit into a $13-million surplus.”

This creates the possibilities of “Pyrrhic surpluses.” For example, as noted above, the current fiscal year boasts a $6 million surplus but burns $58 million in cash. Fifteen years of “surplus” like that and we’ll be a billion dollars in debt.

Staying out of debt is important for the Yukon. We don’t generate much of our own revenue, so cash deficits are essentially “pre-spending” future transfer payments. It won’t be good for the health and education budgets when we get to those future years.

Accumulating debt also usually presages higher taxes, sooner or later. If we aspire to a larger private sector economy, raising taxes is not the way to do it. Just ask economists in some of the Maritime provinces.

There is also a debate among economists about the right time to run a deficit. The Yukon economic outlook is “buoyant” according to budget documents, citing “strong income growth” and “low levels of unemployment.” Our GDP is forecast to grow relatively quickly in 2018 at 4.4 per cent, double the rate the federal budget forecast for Canada overall.

Traditionally, governments use “counter-cyclical” deficit spending to stimulate the economy when it is shrinking. However, in this case the territorial government plans a $51 million cash deficit in the coming fiscal year, adding “pro-cyclical” stimulus into an already surging economy.

You may have seen criticism of the Trump administration’s budget on these grounds, although as a percentage of the economy the Yukon government’s pro-cyclical stimulus is only about a third as strong.

There is an argument for borrowing if it allows us to attract federal projects. Often the feds will offer 75 cents per dollar on a project if we pony up the other quarter. But the capital budget is actually being cut by $29 million in the new budget. And with Ottawa giving us more than a billion dollars a year, it makes you wonder why we don’t use that money to pay our quarter rather than having to borrow even more.

The coming year’s cash burn is caused by some other choices in the new budget. The first is growing government day-to-day spending. The operations and maintenance budget rises by 5.5 per cent, slightly faster than the 10-year average and more than double inflation. The cash burn would have been even higher if this wasn’t partly counteracted by the capital budget being cut.

Overall, the new budget’s cash burn rate and growth in day-to-day government spending are in line with what we’ve come to expect in the last few years from governments of all political stripes. The question, now that our rainy day fund has gone negative, is how many more years this can continue.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.

Yukonomist

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