Value Manitoba will be following along as the new provincial government tries to make good on their promise to make Manitoba into the “most improved province”. One of the ways we’ll measure that improvement is the health of our government’s finances. So to start off, let’s take a look at what we know about Manitoba’s provincial deficit and debt.
When the government spends more on services and expenses than it earns in revenue, the difference is called the deficit. Governments, like households or businesses, borrow money to pay for expenses that they can’t pay for fully in cash. And, like for households and businesses, there are lots of good reasons to borrow money and to carry debt. Consumers buy large items such as cars and houses this way, and businesses get investors or banks to finance new equipment, new buildings, or other kinds of expansion.The total amount of money the government has borrowed over the years and has yet to finish paying back is the debt.
Neither deficit nor debt is necessarily bad. What really matters is if the public is getting good value for government spending, and if the government can afford to make debt payments while continuing to pay for the many services it provides to its citizens.
The Pallister government is making much of Manitoba’s financial situation. Manitobans need to know what is true and what is merely Conservative political spin to justify spending cuts. For example, the Pallister government claimed that we faced a $1.011-billion deficit shortly after taking office in May 2016. We now know that the actual deficit was far lower. Clearly, the Pallister government’s strategy is to paint the situation as worse than it is in order to blame future actions on the past government.
How large is the debt?
The following baseline numbers will ensure we have a more factual understanding of government finances moving forward.
According to the Manitoba Finance report for the first quarter of 2016, the deficit in the NDP’s final year in office totalled $846 million. This is higher than the NDP had forecast ($686 million in 2015-16) but also much lower than the $1.011 billion deficit the Pallister government claimed.
It’s always challenging to understand budgeted deficit numbers because they often include projected income. For example, the NDP government claimed that employment and income growth generated by the infrastructure program would result in higher tax revenues that would offset its costs. The Pallister government has a reduced commitment to infrastructure, so we will have no way of knowing whether previous deficit projections for this year were accurate, because now the goalposts have been moved.
Most importantly, although deficits and debts are often reported in simple amounts like that, they are best understood relative to income, say as a percent of the province’s Gross Domestic Product (GDP, a measure of the total economic activity – income – in the province).
Why’s that? Well, it’s common sense that when you have more income, you can afford more debt: a young part-time service worker can’t afford a $2-million mortgage, for example, but a wealthy executive can. It’s the same with government finances: knowing that the deficit is $846 million doesn’t by itself tell us if that’s affordable or way too much. We need to look at debt relative to income to really make sense of it.
For provincial comparison purposes, we used RBC Economics Research, Canadian Federal and Provincial Fiscal Tables, October 3, 2016 to establish the following baseline data:
The deficit in 2015-16 was $846 million, or 1.3% of GDP.
Net debt in 2015-16 was $21.4 billion, or 32.5% of GDP.
This debt percentage (32.5% of GDP) in 2015-16 is the same as it was in 1997-98, and was the 4th lowest in Canada for 2015-2016. So although those look like big numbers, when you consider them relative to the size of the provincial economy they are pretty modest. And contrary to the kind of scary language our new government likes using, Manitoba is in a much better debt-to-income position than most of Canada.
Can we afford to keep paying the debt?
An even more direct way to talk about debt and deficit is how much it of our income we spend paying back what we owe. Governments make regular payments on debts, much like a homeowner or a business might make monthly payments towards a loan or a mortgage. And just like when the bank decides if someone can afford a mortgage by figuring out how much of their income goes towards housing, the best way to look at these payments is through percentages. The bank wants to make sure we can really afford the mortgage. Similarly, what really matters for debt payments is how well the government can afford them, based on how much money it takes in.
In 2015-16, only 5.7% of government’s revenue went to paying off principal and interest on the provincial debt. That means about 19 dollars out of every 20 that the province spends goes directly to services, front-line workers, and so on. Paying for debt only costs one dollar out of twenty. This is pretty low. And it’s even lower than it was a few years ago: debt payments were 6.1% of provincial expenses in 2012-13, for example, and back in the 90s it was over 8%.
Just like a mortgage, how much we pay depends on both how much we borrow and what the interest rates are. Right now interest rates are very, very low, and the global financial situation makes it look like they will stay that way for a long time. In other words, right now and for the foreseeable Manitoba can easily afford to keep paying its debts.
Manitoba’s debt burden, then, is actually not very severe or onerous. This means we should take a very careful look at the Pallister government’s claims that we “need” to make cuts because of the debt or the deficit.
And that’s the real deal on Manitoba’s debt and deficit.
Look for future posts that measure our progress using this and other social and economic indicators that measure whether the Pallister government is really improving the quality of life of all Manitobans.