As budget day approaches in all Canadian provinces, some of you might wonder how is it possible that provinces like British Columbia, Nova Scotia and Quebec tout a balanced budget, while their debt levels are still rising. After all, isn’t it a little counter-intuitive? It all breaks down to how governments account for such projects and what accounting standards are used to make a budget.
In government accounting terms, there are two types of expenditures one can make. The first type is what is called “program spending”. This is what will figure in its entirety, every year, in every budget. This is what is used to pay for public sector workers, health and education related expenditures, and every other imaginable social program. To put it simply, it’s pretty much like a family’s grocery bill. Just like a family should not go into debt to pay its groceries every week, it is inexcusable for a government to go into debt over program spending as it is prioritizing today at the expense of tomorrow.
The second type of spending is what we generally refer to as “infrastructure spending”. These will typically be large construction projects which will be paid for up front, but for which the total cost will be budgeted over the course of their useful life. For instance, if the government builds a new bridge, it will pay construction companies and construction workers up front, leading to an immediate expenditure equal to the cost of said bridge. That is a negative cash-flow. As governments don’t really have money in the bank these days, this also means an increase in government debt equal to the cost of said bridge. Where it differs though, is in how it is accounted for in the budget. As said bridge will have decades of useful life, its cost will be broken down in yearly increments over the course of its lifespan.
To give an even more practical example, let’s say this bridge cost $400 million and had an estimated 40-year lifespan. You would incur a $400 million in cost on year one, leading to an increase in debt, but you would only account for it by incurring a $10 million annual cost for forty years. If year one’s revenues are $10 million, your budget is balanced, even though you just incurred tons of debt.
While there are some merits to this kind of accounting, given how the asset will be utilized over years and years to come, it fails to take the interest cost into account. Said $400 million bridge’s real price tag, with a 2% annual interest, paid for over 40 years, with $14.5 million plus yearly payments, would be nearly $585 million. For big spending politicians, using such means of accounting lets them get away with much larger expenditure than they otherwise could.
And this is how governments can have balanced budgets and growing debt levels, simultaneously.