Provincial Debt and Capital Investments

Infrastructure is costly to build, operate and maintain, but it is long-lived and delivers benefits across generations. Today's British Columbians are reaping the benefits of infrastructure investments made by their parents and grandparents. Infrastructure is clearly important to all British Columbians as it exists throughout the province to enable economic and social systems to work well.

Careful planning and budgeting is important so government can build new infrastructure, overhaul and update existing infrastructure, and avoid bottlenecks, so that the province is left in good order for future generations. Funding for infrastructure is mainly derived from government revenue. When revenues are not sufficient to offset the cost of its initiatives, government obtains financing from outside sources, mainly through debt issuances that are to be repaid on future dates.

Borrowing for operations may be required to meet other working capital requirements such as loans and advances, or changes in accounts receivable/payable. This type of debt (government direct operating debt) typically declines with surpluses. There is not a dollar for dollar relationship between changes in direct operating debt and the surplus because of changes in other balance sheet items, such as cash balances, loan receivables and other accounts receivables/payables.

Borrowing for capital projects finances the building of schools, hospitals, roads and other social and economic assets. As these investments provide essential services over several years, the government, like the private sector, borrows to fund these projects and amortizes the costs over the assets' useful life.

Chart 1 shows that debt levels have risen sharply over the past decade mainly to finance deficits and capital spending. In 2004/05, a record surplus facilitated a $1.9 billion pay-down of debt. Although the government is forecasting continued operating surpluses that will be used to offset borrowing requirements, absolute debt levels will rise to finance capital projects through March 31, 2008.

Reconciliation of surplus to change in debt

In general, the change in debt will not equal the surplus as:

• debt is required to finance capital spending in excess of non-cash amortization costs included in the surplus; and
• due to other working capital sources/requirements that represent changes in balance sheet items (such as cash balances, loan receivables and other accounts receivables/payables), but do not form part of the surplus.

Table 1 reconciles forecast surpluses with changes in debt. In the updated fiscal plan, debt rises despite expected surpluses mainly due to the impact of capital spending in excess of amortization, and higher commercial Crown corporation debt incurred for capital investments.

Financing capital investments

Significant capital investments are planned over the coming years to meet the transportation, health and education infrastructure needs of a growing economy, and to replace and upgrade existing infrastructure. Financing for these capital investments is provided through a combination of sources:

• operating surpluses;
• cash balances;
• cost-sharing with partners (such as federal or municipal governments);
• partnerships with the private sector (public-private partnerships); and/or
• borrowing (debt-financing).

As shown in Chart 2, debt financing continues to represent a significant portion of financing for provincial capital spending, so the level of capital expenditures has a significant impact on projected provincial debt.

As the financial implications of capital infrastructure spending extend significantly beyond the three-year fiscal plan, government has established a long-term focus on both the need for, and affordability of, capital infrastructure spending.

To incorporate this long-term view into government's fiscal planning and budgeting process, taxpayer-supported and self-supported government agencies have prepared 10-year capital forecasts that will help guide government decisions regarding capital spending priorities for the 2006/07 budget and beyond.

Government's updated three-year capital plan, including priorities and financial information for 2006/07 to 2008/09, will be reflected in Budget 2006.

Debt remains affordable

With forecast surpluses, government direct operating debt (the debt resulting from cumulative historical deficits) is forecast to steadily decline over the next three years. Although capital investments will result in additional debt, they provide essential social and economic benefits and fit within the overall government strategic objective of lowering the taxpayer-supported debt to GDP ratio each year. This ensures that the necessary investments are made in an affordable, sustainable manner.

Chart 3 shows that the government direct operating debt, taxpayer-supported debt and total provincial debt to GDP ratios decline over the three-year plan and that the debt burden remains affordable.

Looking forward

Government will continue its focus on effective and affordable debt management through the following measures:

1. Continued use of surpluses to reduce borrowing requirements and debt.
2. Continued use of forecast allowances and the contingency vote to ensure that fiscal targets are met.
3. Review of cash management practices to minimize the need for borrowing.
4. On-going review and diligent management of capital spending to ensure the appropriate utilization of capital resources, and to establish a sustainable relationship between operating and capital budgets.