Any surplus run by government reduces "net debt", not by 50%, but by 100%. A reliable source reported that Premier Campbell claimed that at least 50% of his government's surplus would be used to reduce the debt. That illustrates a misrepresentation of fundamental accounting principles, not unusual when they get in the way of political spin. Why would Campbell try to minimize the amount by which his budget surplus reduces debt, and why would a Ministerial Assistant claim that a law exists that requires at least 50% of a surplus to be used to reduce the debt? Those concepts are nonsense in a reality where 100% of any surplus is applied against the debt, but in a political world where people may object to unnecessarily high taxes or uncaring service cuts, it may be useful create confusion over the options.

Should the surplus be used to pay down the debt, lower taxes or increase program spending? How many times have you heard that question, usually out of Alberta? The question reflects a misunderstanding of accounting, and it allows politicians to get away with what amounts to a shell game.

A deficit is the difference between income and expense over some period, usually a "fiscal year". In British Columbia, fiscal years start on April 1st and run through March 31st of the following year. Debt is a snapshot of how much is owed at any particular time. Most people understand that a deficit of $2.68 billion, as was incurred in fiscal year 2002-03, results in an increase in the debt. The precise amount by which the debt changes can vary because other factors such as "working capital changes", "capital asset and investment changes", investments in crown corporations and "warehouse borrowings" also change. Nevertheless, the basic idea is simple; spending more than is earned results in more debt. The opposite is also true, earning more than is spent results in less debt. With such simple principles, why is there any confusion over the idea that surpluses reduce debt?

In February the provincial government tables a budget in the legislature for the 12 months starting the following April 1st. If it projects more revenue than expense, it is said to be a balanced budget. The fiscal year ends on March 31s the following year. It takes several months before the government figures out how much was actually spent and received. Sometime in July the audited financial statements appear. What was projected to be the surplus or deficit the previous February is then compared to what really happened. When the books are closed and reported on in July, the new fiscal year has already begun and is more than a quarter of its way to completion. At that time it is too late to go back and ask how to increase or decrease the previous year's surplus or deficit. At the end of the fiscal year, the surplus or deficit is a cold matter of accounting; it either increases or decreases the net provincial debt.

If the underlying factors that contributed to a surplus continue the next year, then it is meaningful to ask what steps should be taken to determine the next year's outcome. Taxes could be cut or spending could be increased so as to reduce the estimated surplus, but at the end of the year, whatever the surplus, 100% of it reduces the debt. Why then would Premier Campbell tell the editorial board of the Province newspaper that by law 50% of the surplus must be applied to reduce the debt? That concept is nonsense since by definition 100% of the surplus reduces the debt. Why would a ministerial assistant compound the error by claiming that "The Balanced Budget Ministerial Accountability Act doesn't specifically state that 50% of a surplus must be used to pay down debt, but its structure makes that happen regardless". On September 19th, Brian Lewis, Business Editor of the Province wrote an opinion piece which said "But by law, half of any future budget surplus has to go to debt reduction." There is no such law; the concept is nonsense, but government representatives claimed that Campbell was correct in making that claim to the paper's editorial board.

Many people feel that the 50% increase in MSP premiums, the 30% or more cuts to services from the Attorney General (and legal aid) to Human Resources, and the underestimate of resource revenues are really responsible for the surplus that is forecast for March 31, 2005. Whatever the excuse for the bad estimates, no one should be confused; at the end of the fiscal year, 100% of the surplus is automatically applied to reduce the province's net debt. Whether that is a good or bad thing may depend on how much you suffered to contribute to the bottom line.