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Limiting provincial borrowing and establishing reserve funds for major capital projects will save billions in the long run
I’ve learned a great deal from my children, including the lesson of restraint. I’ve also found, surprisingly, that children still come back after they’ve left the house for guidance and advice.
Ultimately, learning is learning.
It’s time Canada’s provinces learned from their children – municipalities – on how to handle debt.
Municipalities are created through provincial authority. The province transfers some of its authority to municipalities through legislation. Alberta’s Municipal Government Act is a good example.
The challenge for municipalities and provincial governments is to avoid taxing for today’s operational costs and calling it an investment. This moves today’s cost to the taxes our children must pay even when it makes little economic sense.
Municipalities typically pay for larger capital expenditures in one of two ways. First, they may have saved the money for the expenditure and put it in a reserve. Second, they may borrow for the project.
In Alberta, provincial legislation imposes a debt limit that municipalities can’t borrow beyond without the permission of the minister. In Saskatchewan, unless the borrowing is approved, a municipal council isn’t allowed to exceed its debt limits. In British Columbia, municipal borrowing is limited unless they have the approval of an inspector.
These limits provide assurances that municipalities can, in fact, pay off their debts. This makes a lot of sense. Regardless of the political benefit of borrowing, there’s only so much a council can borrow.
Debt, if used wisely, is a way to reduce taxes at the moment to pay for major additions to communities – for roads, overpasses, recreation centres, water and wastewater treatment plants, and for other local projects. For major capital projects, it ensures that today’s and tomorrow’s users contribute to a project from which they both benefit.
Calgary, in 2016, borrowed $3.3 billion and used 43 per cent of its debt limit (which is twice the city’s revenues). Saskatoon, with $318.8 million in long-term debt, is at almost 57 per cent of its debt limit, and Regina and Edmonton are at 65 and 59 per cent respectively. Over the past 10 years, these cities have all seen substantial growth. So it would be expected that they used their debt to fund much of the infrastructure the public demands.
But at some point, municipalities are restricted from borrowing more by provincial legislation. And every time they borrow, they increase their future spending just to pay off the debt.
Although Alberta and Saskatchewan have restrictions, most other provinces have no restraint on their debts.
Provinces should learn from their children and impose debt limits on themselves.
Provinces should also follow municipal governments by creating reserves to fund future capital projects. Even if the reserves are only for the replacement of assets, using savings would be a welcome change.
Unfortunately, no one can force provinces to make these changes. In fact, the provinces are increasing their debts at alarming rates and future generations will need to pay it back.
It’s up to the provinces to seize the initiative. It’s time they learned some important financial lessons from their children.
Randy Patrick is a research associate at the think-tank Frontier Centre for Public Policy.
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