Recently, Premier David Eby appointed Brenda Bailey British Columbia’s new finance minister.
Bailey has her work cut out for her. The B.C. government’s finances are in a state of freefall, and unless she acts quickly the province will become a fiscal basket case.
Let’s start by quickly looking at the problem. The B.C. government faces a large operating deficit. In fact, it’s the largest deficit in Canada relative to provincial GDP: -1.9 per cent for B.C. compared with No. 2 Quebec at -1.5 per cent, according to RBC calculations.
Largely because of recent deficits, the government is in the midst of a debt binge that makes 2008-09 and COVID-19 look like small potatoes.
If the government continues on its current track, B.C. will be one of the most indebted provinces in Canada in just a few years. This is a remarkable and disastrous turnaround given that the province had the strongest finances in Canada just a few years ago.
Bailey has said some encouraging things these challenges, stating that the government must establish a timeline for returning to budget balance. She also must shrink the province’s debt burden relative to the size of the economy and reduce the amount of money the government spends on debt interest, which has been climbing in recent years.
But if Bailey wants to achieve these goals, she must recognize the root cause of the province’s fiscal woes—that is, a staggering increase in government spending.
Back in the 2000s and 2010s, when B.C.’s government finances were stronger than most provinces, the key to the province’s fiscal success was spending restraint. Throughout that period, per-person spending grew at a rate of approximately 0.5 per cent annually (after adjusting for inflation). However, since 2017 and a change in government, the rate of annual real per-person spending growth increased dramatically to more than four per cent.
Clearly, this spending boom is the reason the province is now on track to becoming one of Canada’s most indebted provinces. If this spending boom had not occurred, the rapid and avoidable run-up in provincial debt now taking place simply would not have occurred.
Therefore, to achieve her stated fiscal goals, Bailey must address spending. She certainly can’t tax her way out of the problem.
Due to provincial and federal policy, British Columbians have endured substantial tax hikes in recent years, which have made the province less competitive but have done little if anything to improve the government’s fiscal health.
More of this bad economic medicine will just make the B.C.’s economy and finances sicker.
The appointment of a new finance minister marks a good opportunity for the Eby government to change its fiscal strategy and get the province’s finances back on track. This will only happen, however, if Bailey takes swift action to address the overspending that’s fuels the province’s big deficits and rapid debt growth. In other words, she must initiate a 180-degree turn on the government’s fiscal policy.
Ben Eisen is a senior fellow in Provincial Prosperity Studies at the Fraser Institute.
