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Yukonomist: Legacy of debt

A politician’s retirement is a time for self-congratulatory reflections by the old leader and polite thanks by their successor.
Premier Sandy Silver speaks during Question Period in 2018. One of his legacies is the steady accumulation of debt, says Keith Halliday. (Yukon News file)

A politician’s retirement is a time for self-congratulatory reflections by the old leader and polite thanks by their successor.

Neither usually go into how much the debt went up during the leader’s tenure.

Thus it has been as Premier Sandy Silver handed the reins to now-Premier Pillai.

There has been some debate around town on Silver’s legacy. But one aspect of it is undebatable: debt.

Silver took office in December 2016. When the fiscal year ended a few months later, the Yukon government’s net financial assets were $93 million. By the last supplemental budget he laid down in October 2022, that had turned into a liability of $214 million, a swing of $307 million or about $7,000 per Yukoner (these figures exclude the big government-owned corporations such as the hospital and Yukon Energy).

He consistently borrowed throughout his tenure. Mainstream economists recommend so-called countercyclical fiscal policy, borrowing in bad times and repaying in good times to smooth out the ups and downs of the economy. Silver ran more of a “pedal to the metal” fiscal policy. He did borrow during the pandemic to stimulate the economy. He also borrowed in good times, stimulating the economy when we already had labour and housing shortages.

Even his last supplemental budget included a valedictory trip to the bank: an extra $6.5 million in debt not planned in the spring budget.

Debt is not necessarily bad. The territorial spending spree leaves us with assets you can see as you drive around the territory: improved highways, a new Francophone school, Yukon Housing projects, a fixed up runway at YXY and more.

Indeed, Canada was built by big projects that often involved government borrowing. Assets such as our airports, ports and railways required debt, but then we grew the economy to pay it back.

However, if you flip through Yukon capital budgets of the last few years, you’ll notice that most of the projects obligate the government to new operations and maintenance spending rather than growing the productive side of the economy. The planned $28-40 million Arts and Heritage Resource building is an example. I am a big supporter of Yukon heritage, but have to admit that this facility will probably entail ongoing spending on staff and maintenance that will outweigh the extra tourists it will attract to the Yukon.

A healthy society needs a healthy mix of social and economic assets.

You are probably asking how we are going to pay back $214 million. The answer is: we probably won’t. That is the advantage of being a government rather than a person; you don’t die. A common government debt strategy is to just pay the interest and pass the debt onto the next generation, hoping growth will shrink the debt as a percentage of the economy.

But there is still the cost of the interest payments. Yukon government bonds do not trade publicly so it is hard to know the latest interest costs. And the figure for net financial assets above includes various liabilities such as future retiree benefits that don’t have an interest rate associated with them.

But, as a thought exercise, how much does it cost to pay the interest on a perpetual $214 million debt?

When the Yukon Hospital Corporation’s pension plan needed a 15-year solvency loan, the Yukon government charged it the prime rate. The Bank of Canada prime rate is currently 6.45 percent. So the hidden cost of the assets Silver borrowed to build would be $14 million per year.

The Yukon government’s bankers would probably give it a better rate than that. Suppose the Yukon negotiated the same rate that Manitoba pays on its 2025 bonds: 3.49 percent.

In that case, the annual carrying cost would be $7 million.

There are two ways to think about this number. On one hand, you’ll be pleased to know this figure would not cause the Yukon’s bankers any stress. It is a tiny fraction of the transfer payment and easily payable each year.

On the other hand, think of what $7 million per year could pay for. In the Spring budget, the Yukon government set aside $1.8 million for its new dental program covering 8000 Yukoners. With that $7M it could have covered another 30,000 Yukoners. Or you could do something like hire 70 additional nurses.

We shall see what the new premier does. The Yukon is authorized to borrow up to $800 million, so there is lots more runway ahead for Silver’s pedal-to-the-metal fiscal policy to continue (and Silver will be staying on in the new cabinet as minister of finance). In his first email to Liberal Party members, Premier Pillai said his “first task will be to seek an extension” of the Liberal-NDP political alliance that keeps the minority Liberal government in power (and which sparked the new dental program).

With almost $600 million in borrowing headroom left, we can guess that the Liberal-NDP negotiations will be more focused on spending than on reducing borrowing.

Keith Halliday is a Yukon economist, author of the Aurore of the Yukon youth adventure novels and co-host of the Klondike Gold Rush History podcast. He won the 2022 Canadian Community Newspaper Award for Outstanding Columnist.