Tuesday, March 20, 2007

NB Budget parts 2.5 and 3

In my second budget post the other day, I claimed I was going to cover capital/infrastructure spending and didn't, however it doesn't really fit in with "part 3" so I will carry on where I left off in Part II first and then get in to Part III.

Capital Spending

Traditionally we actually have two budgets in New Brunswick. The Capital Budget (i.e. construction) is introduced in the fall to allow time for tenders to go out so construction can begin at first thaw. Then the ordinary budget comes out in March. However, as was the case in 2000 after Lord took office, and again this time after the Liberals took office in October 2006, the capital budget was delayed to coincide with the main budget.

Most capital expenditures fall under two departments: Supply & Services, which builds almost all of the buildings for government, including schools and hospitals and Transportation, which builds roads.

Here is the breakdown by department with capital spending:

Agriculture & Aquaculture



Local Government

Natural Resources

Regional Development

Supply & Serivces

Tourism & Parks


So capital expenditure under the Transportation department accounts for 85% of all capital spending and an impressive 10% of all government spending period. Building roads is a good thing and I am glad to see this figure. However, unfortunately, this isn't all going into roads. More than half of it, $408,800,000, will be paid to the road builders of the Grand Falls-Woodstock highway upon compeletion as part of the agreement drafted by the former government.

Here is how the big ticket items break down:

General Bridges $25,000,000
General Roads $49,500,000
Rural Roads $20,000,000
Canada-New Brunswick highway agreements (TCH mostly) $573,562,000
Border Upgrades (St. Stephen-Calais bridge mostly) $38,000,000
Routes 11 & 17 $5,000,000
Urban Bypasses (Marysville/Route 8 mostly) $6,288,000
Vehicles for the government fleet (including maintenance of existing fleet, fuel, etc) $7,000,000

Supply & Services:
New construction for Agriculture & Aquaculture, Education and Health $67,569,000
Maintenance of old facilities for Education, Health, Legislative Assembly, Post-Secondard Education, Training & Labour and Supply & Services $30,979,000

Marshlands (Agriculutre & Aquaculture)
Equipment for schools (Education)
Equipment for hopsitals (Health)
Improvements in unincorporated areas (Local Government)
Musquash Watershed and NB Trails (Natural Resources)
General capital projects, funds to top of the provincial share of gas-tax funded infrastructure, and infrastructure under the Canada-New Brunswick Rural Municipal agreement (Regional Development)
General improvements (Tourism & Parks)

This all seems pretty standard and reasonable.

Now for.... Budget Retrospective, Part III

For my next installment on reviewing the budget, I will be looking at "whether or not the budget really is balanced".

When is a budget balanced?

That should be a fairly easy question, but sadly it is not. Let's take a look at the past few budgets for an example:

Revenue: $6,811,506,000
Expenditure: $7,167,486,000
Difference: -$355,980,000
Stated Surplus (Deficit): $37,097,000

Revenue: $6,258,293,000
Expenditure: $6,345,284,000
Difference: -$86,991,000
Stated Surplus (Deficit): $22,224,000

Revenue: $6,109,314,000
Expenditure: $6,105,325,000
Difference: $3,989,000
Stated Surplus (Deficit): $98,880,000

2004-05 (This budget had the inspiring title "Living Within Our Means")†:
Revenue: $5,877,004,000
Expenditure: $5,877,581,000
Difference: -$577,000
Stated Surplus (Deficit): $54,281,000

Revenue: $5,515,807,000
Expenditure: $5,620,843,000
Difference: -$105,036,000
Stated Surplus (Deficit): $7,464,000*

The Auditor General rejected this figure saying, regardless of any accounting measure, the best real picture was a deficit of $101,036,000.

Revenue: $5,355,426,000
Expenditure: $5,414,074,000
Difference: -$58,648,000
Stated Surplus (Deficit): $21,352,000*

The Auditor General rejected this figure saying, regardless of any accounting measure, the best real picture was a deficit of $58,648,000.

Revenue: $5,170,492,000
Expenditure: $5,135,736,000
Difference: $34,756,000
Stated Surplus (Deficit): $34,756,000

Revenue: $4,834,833,000
Expenditure: $4,813,542,000
Difference: $21,291,000
Stated Surplus (Deficit): $21,291,000

Revenue: $4,779,097,700
Expenditure: $4,766,852,300
Difference: $12,235,400
Stated Surplus (Deficit): $42,245,400

As you can see, of the last 8 budgets, only 2 of them have stated their surplus/deficits with the magic formula of SURPLUS = REVENUE - EXPENDITURE. In fact, the Liberals, while in opposition, went so far as to try to embarrass the government by passing a motion which said, "a deficit occurs when expenditures in a fiscal year are greater than its revenues." By that standard, this budget is in the red and running a deficit of $355 million.

However, looking at the numbers above, you will see that in 1999-2000, 2000-2001 and 2001-2002 the budget was, more-or-less, in sync with the magic formula of SURPLUS = REVENUE - EXPENDITURE. If 2002-2003 and 2003-2004 this was true as well if you take the word of myself and the Auditor General. The Tories used some fuzzy math in these years, which the AG rejected, in which they argued that money they had paid down on the debt in previous years could instead by accounted as being carried over so, essentially, they accounted for the surpluses of previous years twice - first by calling it a surplus in the previous year and paying it on the provincial debt and second by saying that if they were not increasing the debt by more than they decreased it in previous years, they were simply carrying the money over for future use.

However, all of this changed with 2004-2005. This is when the previous PC government, under the recommendation of the Public Sector Accounting Board, an arm of the Chartered Accounts of Canada, changed the accounting of capital assets. The explanation released by the Finance Department at the time explains the justification for this.

I am much more comfortable, in general, with the magic formula of SURPLUS = REVENUE - EXPENDITURE. However, I am not an accountant and this is an accounting matter. If two New Brunswick Auditors General, a PC and Liberal government, the Chartered Accounts of Canada, the Goverment of Canada and the governments of most provinces are okay with it, I guess I should wake up and smell the coffee that has been brewed by the experts.

There is one noticable benefit to this accounting measure. In recent years, as running a deficit has become a horrible sin for governments, the amount of infrastructure construction and improvement has been cut like everything else which would, if not turned around, put us in dire straights in a few years when this infrastructure begins to fail.

Since this measure has come into place, the capital budget of New Brunswick has gone up considerably, which I think is a good thing, and this has been offset in the books by this expert designed and approved accounting method.

This in particular explains why this year their is such a difference between "SURPLUS = REVENUE - EXPENDITURE" and the stated surplus of the government; the expenditure includes A LOT of capital construction and improvement and that is offset, in part, by the accounting measure.

So, is this budget balanced? According to the experts, yes. According to arithmetic and the motion passed by both parties in 2005, no.

I think I will err with the experts and declare this a balanced budget.


Anonymous said...

It's actually not an accounting term, more of a political one. I was reading some documents about Nevada for David Campbell's blog and they were onto this very topic-what exactly is a 'deficit'. There are, unfortunately, TWO definitions of deficits, a structural deficit and a, damn, now I forget the name. The Nevada article even footnoted the definition by the Canadian Centre for Policy Alternatives, wow, how often have you seen that in Canada!

But it seems governments have sort of a 'theoretical' deficit which in economic terms means how the numbers would add up "considering full employment and full economic growth". So how often is that? In NB, never.

So after reading all through this stuff is simply seems that like the cynics will attest, 'the government will call it what it wants'.

Eugene said...

To me it is a balanced budget. I look at it like financing a car. You take out a loan (increase in net debt), pay the car dealer (pay the road builder), and then you pay your monthly payments (expense included in the "budget"). So when you balance your chequebook, you simply cross the loan and car cost. The original purchase doesn't affect your bank account, only the monthly payments afterwards do. Your net worth is decreased by the loan and increased by the value of the car. The real question is are you accounting for the depreciation properly. As they say, the value of a new car drops 20% as soon as you drive it off the lot. Not sure about the value of the lot itself which is what we're concerned with here ;)

Anonymous said...

Not exactly. The point is that the road WAS PAID FOR. That means you just dropped $30 grand at the dealership. That means, guess what, you probably don't buy groceries or pay your rent because you have no money.

So ultimately that half a billion dollars is GONE. It WASN"T a 'loan', unless i"m missing something here. In the main estimates it lists $568 MILLION for the budget for the Department of Transportation.

Now, for revenues, the budget estimates claim that $135 million will come from the feds in the Canada-NB Infrastructure Program.

So we're talking about money that is leaving the pocket. That's 428 million. As Eugene says, the province now has a nice highway, but it DOESN"T have 428 million.

People should also keep in mind that this is the Infrastructure Fund, remember, the Fund that apparantly the feds had available but the province or city of Saint John hadn't bothered to apply for for harbour cleanup. This is 135 million that isn't available for other infrastructure projects.

Its very odd to see people making a huge fuss over a guaranteed loan or grant to a credit union, meanwhile, half a billion dollars goes to one stretch of a highway.

To put it in blunt terms-this is 'Atlantica'. Spend all the money on highways and other business freindly perks while screwing over taxpayers. Notice how nobody even MENTIONS toll highways anymore, even though that was supposed to be what the 'free market' was all about-you PAY for use.

There's no doubt that dividing the highway does have a use other than for trucking, but very marginal. Imagine instead paying $4 every time you drove up the trans canada rather than the HUGE hit the province is taking for it. For those who travel it for work a tax credit could be offered.

But this way essentially bankrupts the province. This is money they no longer have for, well, as we've seen, ANYTHING. And there is still plenty of highways left to go. Yet most people, I suspect, fly to Quebec and Ontario and don't even use the Trans canada.

nbpolitico said...

There is a loan - or rather a series of loans. When the government increases its net debt - as is the case here - it is taking out loans to pay for its yearly budget.

Eugene's example it perfect.

Anonymous said...

Take a look at the estimates. The only difference between last year and this are in the capital accounts. That's the "capital revenues" and "investment in tangible capital assets". On a surplus of that amount, you've gotta really want to BELIEVE in their assessors valuation of those assets.