The Tyee reports that the BC government is running a cash deficit. This is the kind of story the NDP should have released before the election — before!
Most people don’t have the theoretical background to call bullshit on the author, and “1.4 billion dollar cash deficit” sounds really bad. They could have made a lot of political hay… But I suppose parties that make simple strategic mistakes shouldn’t be in power.
Government accounting is a triple threat: boring, complicated, and corrupt. The whole mess should be run as a non-profit with quad-entry bookkeeping, full consolidation, and complete annual audits. Everyone else plays by those rules — so should the people who enforce them!
But in this case the article is yellow-tinged. Studies show accrual accounting, when not interfered with by management, is better at representing the financial position of organizations than cash accounting. Here’s why, very roughly:
You buy an asset with a 10-year life for $100,000 and it pays you $1,000 per year. After a couple of years you request a summary from your chartered accountant.
Cash accounting says your ROI is infinity: You’re getting $1,000 per year at no cost.
Accrual accounting gives the correct result. The cost of the asset is actually $10,000 per year ($100,000 cost / 10 year life) and you match that with the $1,000 per year income for a return of 10%. Simple check: $1,000 per year * 10 years / $100,000 cost = 10% return on investment at purchase time.
The Tyee article claims the government’s running a $1.4 billion-plus cash deficit this year. That can be from payment of old obligations allocated to previous years, or more likely from funding multi-year stimulus programs allocated to future years.
BC has a history of doing shady stuff like using non-arms length suppliers and incorrectly allocating expenditures to crown corps that report non-consolidated figures, but it sounds like we’re on the level here.
Incorrect allocations is what they were doing at BCBC when I was there. Basically what you do is, for example, buy a provincial weather control satellite for a billion bux and then allocate the expense to BC Ferries “to make crossings safer” or something. The province gets a weather control satellite, BC Ferries reports a staggering loss, and, assuming Ferries isn’t fully consolidated, there’s no change in reported government spending. I think this is illegal now.
In short: “Cash-versus-accrual” isn’t anything to stress over. The government is doing the correct, logical thing.
That’s the first time Jack’s ever said that! His cognitive behavioral therapy seems to be working…
Tags: accounting, Politics
Thanks for the careful read, Jack.
A few details though:
1. You missed a decimal point. It should be a $1.4 billion deficit, not $14 billion;
2. I was reporting what Statistics Canada put out yesterday. I’m not sure why they use cash basis accounting, but they do;
3. I was very clear in my report that there is a big difference in how StatsCan and how the government look at the books. Whether that accounts for the large difference of opinion on the size of the deficit we will see when the public accounts are released.
Thanks for the explanation!
My understanding is that the BC Liberal government has never claimed that they have a balanced budget with respect to capital expenditures. They borrow against the future to build stuff but not provide services.
I think neither party can get into a discussion about that because voters’ eyes glaze over…
My bad Andrew, fixed. Thanks.