Grading the budget
Premier Sandy Silver brought down his first budget last week. Now almost six months since he was elected, many were keen to see how his campaign speeches translated into budget reality.
A few weeks ago, as budget suspense grew among Yukon policy wonks, I wrote a column laying out how a school teacher might score Silver’s first assignment out of 10.
Before we get to that, you should know one significant new fact that appeared in the budget. The biggest surprise to me was that the Yukon government’s net financial assets at the end of the last fiscal year, on 31 March 2017, turned out to be much higher than expected. The Pasloski government’s last spring budget estimated that this figure, which you can think of as roughly the Yukon’s cash in the bank, would be down to $57 million by that point. This included plans for some determined pre-election spending.
Instead, the figure turned out to be $93 million. One explanation could be that the previous government announced a lot of pre-election spending but didn’t manage to get all the projects going in time. In any case, having a cash balance of $93 million gives Silver a lot more room to maneuver in the new fiscal year than $57 million. The cash deficit last year was “only” $60 million, meaning the Yukon government burned through less of its rainy day fund than in some previous years.
In terms of our 10-point test, Silver scored one point for keeping the Yukon out of deficit in this coming fiscal year. He projects that cash balance of $93 million mentioned above will be down to $10 million by March 2018. That’s a burn of over $80 million, more than last year but still ending in positive territory.
He misses a second point since his current plan does not keep us out of deficit for the rest of his term. He projects more cash burns in future years that will lead the Yukon into $216 million of debt by March 2021.
This is a big deal. Despite our cash reserve dwindling, he actually accelerates the cash burn and has a higher cash deficit this year than last.
The problem with $216 million of debt is that, essentially, the only way we can pay it back is from future transfer payments. So Silver will be, if he follows through, effectively pre-spending future transfer payments. This leaves a hole for the next government.
I suspect he’ll have no problem borrowing the money, since lenders will know we have a big transfer payment from Ottawa to back up the loans. But I don’t envy future Yukoners having to pay interest and principal on that debt.
Next on the test was two points for how Silver cut the budget. I was guessing that he would choose to reduce the cash burn, and that this would require freezes or cuts to the capital and operations budgets. I was going to award one point for not taking all the money out of the capital budget, and another for protecting frontline departments like health and education compared to headquarters agencies. But he actually increased both the capital and operations budgets.
He has put off some tough decisions, at the cost of the higher cash burn mentioned above. So I can’t really score him on these points until next year. To cut him some slack, I’m removing these two points from the scale and turning it into a score out of eight.
Next are tax cuts. It may seem counter-intuitive for me to be suggesting tax cuts when we have a cash burn, but I believe that we need to keep inching our tax rates lower. This is to attract more businesses and residents from the provinces to grow our population and private sector. We get lots of government money from Ottawa and can actually have both high government spending compared to provinces and lower tax rates at the same time.
Silver had promised in his election campaign to abolish the small business tax. In my earlier column, I said this would be worth half a point. But Silver actually broke this promise and only cut the tax from three per cent to two per cent. So let’s give him a quarter point.
He also cut the corporate tax rate, which I’ll give another quarter point for. But he didn’t cut taxes for individuals or sole proprietor businesses. So that leaves him with half a point out of a possible two.
Next was a possible two points for major infrastructure projects that improve our economic capacity. While things like the new francophone high school create construction jobs in the short term, we also need things like power plants and fibre optic backup cables to support private sector economic growth. In my earlier column, I said these projects needed to be a certain size — say at least $5 million — to make a big difference compared to a lot of small projects.
Silver’s budget has no investments of this scale in power, backup fibre cables or similar economic infrastructure. It does, however, have money for some small renewable energy projects and also for maintenance of economically important assets such as highways, airports and bridges.
So let’s be generous and give him half a point for that.
The final two points were for giving private sector decision makers more information on his proposed carbon tax. Unfortunately, the word “carbon” is not mentioned in his budget speech. So mining companies and other energy-intensive businesses will have to wait to see how their sectors will be treated in terms of carbon-tax rebates, and how this affects their business cases.
I also had a provision for an automatic fail if Silver increased taxes, since this would hit our economy hard. He didn’t raise any tax rates, other than tobacco, so he didn’t trigger this part of the test.
Overall, out of our new scale of eight points, Silver scored two. Not a great score, but it’s early in the term and he has lots of time before the final exam at the next general election.
Hopefully his next budget will include more specifics on significant economic investments, the carbon tax and how it affects mining and airlines, and a plan to change his trajectory towards that $216 million in debt.
Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.