PALMER: LIBERALS LACK LONG-TERM VISION

Hazards ahead: B.C. Liberals must prepare to pay as population and infrastructure age, auditor general says

The B.C. Liberals need to pay more attention to the long-term sustainability of provincial finances, lest their balanced budgets be swamped by the twin challenges of maintaining an aging population and aging infrastructure.

So says auditor general Carol Bellringer in a report on fiscal sustainability released Wednesday. While acknowledging the government does a relatively good job of reporting on the province’s financial health in its three-year budget and fiscal plans, she went on to explain why that is not good enough for the longer term.

After posing the question “why is a longer-term outlook important?” the auditor general answered: “For the same reason you look ahead while you drive a car or walk through a crowded market. You need to see far enough ahead to avoid hazards. And the slower you are to react and adjust, the further ahead you need to look.”

For a government, she continued, “reacting to pressures only once they emerge within the three-year planning window is not sufficient, because government programs are very complex and citizens expect that the stability of programs will be protected. This means that changes should occur gradually, and citizens should be informed and consulted as they occur.”

Her foremost concern was with the looming impacts on provincial finances of an aging population, from slower growth (because fewer people are working) to increasing demand for the most expensive program in government — health care — at the very time when the number of taxpayers will be shrinking.

B.C. is at the leading edge of this trend, with proportionately more oldsters than other provinces and with health spending, despite some downward bending of the curve, consuming a growing share of the budget. The onus is mostly on the provincial treasury to meet the challenge because Ottawa funds only a quarter of B.C.’s $18-billion-and-counting health budget. Moreover, as the auditor general notes:

“The federal government has mostly insulated itself from the fiscal impact of an aging population by tying the future growth in federal health care funding to the growth of the wider economy. This means provincial governments will have to fund cost escalation that exceeds economic growth … a significant risk because health-care costs have been growing faster than the economy for a number of years and the impact of population aging on health-care costs is expected to intensify in the future.”

The auditor general also wonders about the sustainability of the capital side of the budget, meaning the construction and upkeep of public buildings, roads, bridges and other infrastructure assets.

“Future costs depend on how well government has maintained assets, and what condition they are in,” she wrote. “Also, the historical cost of assets, particularly those acquired decades ago, are no longer a reflection of replacement cost or the capital needs of government in the future.”

But apart from some exceptions like BC Hydro, the auditor general’s staff found “the B.C. government does not report on asset condition.” Therefore the province doesn’t know what it doesn’t know about the cost of replacement and upkeep for the future.

“With revenues expected to experience downward pressure in the future, governments may need to find innovative ways to finance needed renewal of capital infrastructure,” Bellringer wrote.

While conceding that the practice is “still in its infancy” among Canadian provinces other than Ontario, the auditor general provided a lengthy listing of jurisdictions — ranging from New Zealand to Denmark to the U.S. — that report on fiscal sustainability for terms as long as 75 years.

She recommended B.C. follow suit: “Information should include projections of future cash inflows and outflows, a discussion of the important elements of long-term fiscal sustainability, and a discussion of the principles, assumptions and methodology underlying the projections. Projections should be prepared on the basis of current policy assumptions, and assumptions about future economic and other conditions.”

The Liberals responded by promising to work toward additional reporting on fiscal sustainability. They likewise accepted the recommendations from a companion report from the auditor general on the revenue side of the budgeting process that was generally favourable (“consistent … reasonable … a good foundation”) with a few caveats.

But the Liberals have not always rushed to embrace the auditor general’s recommendations, most notably in a lingering dispute over the presentation of the public accounts.

The main issue is how to apply public-sector accounting rules regarding long-term funding commitments from the federal government. The in-house comptroller general argues the dollars should be booked in the year they are to be paid, while the auditor general’s reading favours the year that the promises are made.

Though either approach will account for the dollars eventually, the disparity in any given year can be dramatic. When the books closed two years ago, the Liberals, taking their lead from the comptroller, reported a deficit of over $1 billion, while the auditor saw a surplus of close to $2 billion.

Public sector accounting is confusing enough without the two watchdogs disagreeing on such a fundamental question. With the latest version of the public accounts set for release early next month, it would be nice to discover they’ve reached a consensus on the bottom line.