Yukonomist: Budget 2020: Borrowing to keep the good times rolling

Another year of record government spending thanks to the distant taxpayers of Southern Canada.

The Yukon government’s 2020 budget borrows to keep the good times rolling. For now, anyway.

The territory’s rainy day fund is a distant memory. Our net financial assets went negative in fiscal 2018 and the new fiscal year’s budget foresees debt to top $80 million.

With a continuing labour shortage and the lowest unemployment rate in the country in 2019, the budget in effect stimulates an already highly caffeinated economy.

Total spending will be a record $1.522 billion, up six per cent over last year’s budget. Population growth was only 1.7 per cent, so spending per person is up significantly.

The budget also shows the Yukon’s increasing dependence on Ottawa. The feds provide 86 per cent of this budget, up from 83 per cent in fiscal 2018.

The budget predicts a small surplus of $4 million for fiscal 2020, although fiscal 2019’s deficit was significantly revised upwards to $19 million of red ink. However, that $4 million surplus is based on the accrual method of accounting. This means that it spreads the cost of buildings and other new assets over future years.

Very roughly, if the government bought an asset for $100 that lasts ten years, only $10 of that cost shows up in this year’s budget. Politicians like this approach, since they can announce the $100 at a press conference, talk about the jobs it creates, and only have $10 count towards the deficit.

Wary citizens, however, should also watch the cash deficit. The whole $100 needs to be paid for, and any money borrowed will need to be paid back. On a cash basis, the Yukon government was $60 million in the red in fiscal 2019 and plans to borrow for a $21 million cash burn in fiscal 2020. And that’s assuming no further borrowing is announced in the Fall supplemental budget.

There are obvious short term political benefits to borrowing and spending, Interest rates are relatively low, so the cost of renting money isn’t as much of a problem as it was in the past. The daily cash burn rate of the new budget is lower than last fiscal year. Fading voter memories of Canada’s 1990’s fiscal crunch also mean that politicians face less resistance from voters for pre-spending the transfer payments of future governments.

Nonetheless, there are serious downsides to a spend-it-all-now-and-more approach. If we are already stimulating the economy, what should the government do if we are hit — just hypothetically — by a global pandemic that pummels mineral prices and tourism? Borrow and spend even more?

Even if interest rates are low, the money still needs to be paid back eventually. Unlike provinces which have large tax bases, we will have to use future transfer payments for the bulk of the repayments. The borrowed money is not going into assets with future revenue streams like toll roads or windmills. Future users of the health and education systems may not be happy with what that means for future health and education budgets.

Now that we’ve declared a “climate emergency,” you could also argue it makes sense to borrow to finance the massive, generation-long shift in our energy system from fossil fuels to renewables. The Yukon government owns Yukon Energy, after all. However, this budget contains only $1.5 million for renewable energy projects. That’s a mere one tenth of one per cent of total spending. You won’t power many heat pumps or electric cars with that.

One has to wonder about the Yukon Financial Advisory Panel, which the Yukon government commissioned in 2017 to cast a beady eye over the territory’s finances. You’ll read in vain for recommendations from that panel that we keep borrowing every year until we hit our federally imposed territorial debt limit. Was the Panel a serious fiscal exercise by the Department of Finance, or an elaborate public theatre project by the Arts and Culture Branch?

The other issue that citizens need to think about is how reliable the estimates in this budget are. The Panel said that, “In nearly every year for the past 15, budget projections of territorial spending have understated the actual growth.” Just in the last fiscal year, revenue, spending, the accrual deficit and the cash burn rate have all been revised upward from what was tabled in the Spring budget.

Revenue was revised up $30 million, mostly thanks to a $28 increase in federal funding, which was nice. But spending has been revised up even more, at $43 million higher than expected. We shall see what the final year-end tally says.

Another big issue the Panel flagged was rising health spending. This is a major issue for all provincial and territorial governments, especially as the population ages. The Panel included a chart showing the historical tendency of Yukon health care spending to rise faster than the Canadian average, corrected for the Yukon’s age and gender mix.

Health and Social Services is the biggest department, with a budget of $461 million for fiscal 2020. This foresees operations and maintenance spending rising at an annual rate of 5.7 per cent since fiscal 2018. That’s about two points faster than the combined growth in inflation and population, which is a rough benchmark to adjust for rising prices and a growing population.

Fortunately, a two-point spread is not a huge problem in the short or even medium term. But if it continues for the next decade, it will become increasingly difficult to fund health care without clamping down on the budgets of other departments. Especially if health spending is boosted mid-year and that two point gap gets larger. Health’s spending for fiscal 2019 was revised up by $13 million compared to that year’s Spring budget.

There are many worthy projects in the budget. But is every project in the budget really worth borrowing for? The Yukon does not need a policy of austerity. But running up debt year in and year out is a bad idea, especially with things on the horizon like a fiscal response to Covid-19 and massive investments in renewable energy.

But that’s worrying about the future. In the meantime, enjoy another year of record government spending thanks to the distant taxpayers of Southern Canada.

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 and received the bronze for Outstanding Columnist in the 2019 Canadian Community Newspaper Awards.

Yukonomist

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