BC Budget 2009: Commentary

logo_bcgov.gif  2009 BC Budget

A fiscal conversion, but not a philosophical one

PATRICK BRETHOUR
Globe and Mail
February 17, 2009

Vancouver — Gordon Campbell has brought down the budget that Stephen Harper could only wish he had delivered – a deficit, but only the deficit that was necessary under the circumstances.

British Columbia will rack up a $495-million deficit in the next fiscal year, with the shortfall shrinking to $245-million in the following year and disappearing altogether by March, 2012.

On its face, the deficit is far smaller than many economists had expected (and less egregious than the government's supporters had feared). But even that surprisingly small number overstates the appetite of the Campbell government for deficit financing.

Unlike other governments that have jumped, or been pushed, into a deficit position, the B.C. Liberals are not defending the change on a philosophical basis. Deficits, however small and however temporary, remain anathema to Mr. Campbell and his ministers.

“There is no one around the cabinet or caucus table that is enthusiastic about us going into deficit this year,” Finance Minister Colin Hansen told reporters before delivering his budget speech to the legislature.

The government's anti-deficit words are matched by action, or rather comparative inaction. Mr. Hansen says B.C. has no structural deficit, meaning that the end of the recession should erase any shortfall – and that there is not a flood of new spending.

But dig deeper into the numbers of the budget and an even more conservative fiscal picture emerges. The government will pump $2.9-billion into the B.C. economy over the next three years to combat the recession, including $2-billion on an infrastructure spree (half-funded by Ottawa), another $401-million in accelerated provincial infrastructure spending and another $485-million from the fiscal stimulus package that Mr. Campbell unveiled in the fall.

That sounds like a stimulus package that Stephen Harper could have written, and that John Maynard Keynes would love. Despite the deficit, the B.C. government has become the last bastion holding out against the new fervour for deficit-fuelled stimulus spending.

The stimulus measures are only one half of the Campbell government's fiscal plan. On the other side of the ledger are spending cuts – big ones. First, there are general administrative efficiencies to be wrung out of various government departments, with advertising and travel spending taking major hits. The Liberals are also counting on a wage freeze in the public sector to deliver $400-million in savings in 2009-10 and 2010-11. Add it all up and the spending cuts amount to just over $3-billion – more than the stimulus spending. In the coming year, stimulus spending will outpace budget cutbacks in B.C., although only by a few hundred million dollars.

Over three years, the Liberals will actually withdraw $150-million from the provincial economy – and that figure is only as low as it is because of $1-billion that the federal government is contributing to the infrastructure spending.

The last-minute fiscal rectitude has left the government's supporters pleasantly surprised, and its opponents – particularly among public-sector unions – fuming.

Jim Sinclair, president of the B.C. Federation of Labour, condemned the budget cutbacks as nonsensical yesterday, zeroing in on the wage freeze and provisions for laying off civil servants as measures that show the government is not serious about lessening the bite of the recession. “Unemployment is the opposite of stimulus,” he said.

Meanwhile, the business-minded supporters of the conservative-minded provincial Liberals are quietly relieved that the government has made only a limited foray into deficit financing. Jock Finlayson, executive vice-president of the Business Council of British Columbia, said he had been expecting a deficit topping $1-billion.

He agreed that the B.C. budget is out of sync with the relatively free-spending ways of Ottawa. “It's a cautious budget for difficult times,” he said of B.C.'s fiscal plan, adding that the national government is better positioned to take the lead on stimulus spending because provinces are likely to see the effect from any of their own expenditures leak outside their own boundaries.

John Winter, president and chief executive of the B.C. Chamber of Commerce, praised the budget-cutting as a welcome sympathetic response to the waves of layoffs sweeping over the private sector. “That is reflective of the real world.”

Asked about the economic logic of increasing spending in one area while cutting it in another, Mr. Hansen took a similar tack. “It's a budget that says government has to live within its means.”


From surplus to 'frankly scary' in just one short year

GARY MASON
Globe and Mail
February 18, 2009

VICTORIA — There are two ways of looking at the budget presented yesterday by the British Columbia government.

The first is just how dramatically all the numbers have changed in 12 short months. And the priorities too.

Last year, the British Columbia government was projecting nearly a $1-billion surplus. The province was the happy recipient of hundreds of millions of dollars in oil and gas revenue. Premier Gordon Campbell was being hailed as a green revolutionary for introducing Canada's first true carbon tax.

This year, the environment rates barely a mention in the budget. Revenues have fallen off the cliff. After proclaiming for years that he'd never run a deficit, Mr. Campbell listened to his Finance Minister tell the legislature the province will spend almost $500-million more than it will bring in.

Which brings me to the second way of looking at this budget.

Compared with the kind of recession-related money problems a place like California is experiencing, this is nothing.

British Columbians had been warned a deficit was coming. The legislature had to be convened earlier this month so the government could introduce a legislative amendment that would allow it to run a deficit. Still, I think many were surprised it ended up being as small as it is – $495-million this fiscal year and a projected $245-million in 2010-11.

California is facing a $40-billion shortfall and is talking about laying off 20,000 civil servants. (Or put this way: B.C. has one-eighth the population of California but a deficit 1/88th the size of the one down there.)

Still, many of the figures found in B.C.'s budget are sobering and remind us of how different the world is today from a year ago.

One chart, for instance, illustrates the $6.6-billion decline in revenues the province is anticipating over the next three years. That includes a $4-billion tax-revenue hit and almost $3-billion less in royalties and taxes from natural resources.

The bar graph charting the economic woes in the United States is equally chilling. The annual growth in real GDP was 2.7 per cent in January, 2008. But it begins shrinking in each successive month until the bars on the graph dip below the baseline into negative territory. Since September of 2008 the decline in real GDP growth is 3.2 per cent.

“We've never seen numbers like that,” one Finance Ministry official said yesterday. “They are frankly scary.”

They are. And I think the B.C. government is being hopeful that the U.S. economy will begin turning around late this year and that real GDP growth will be almost 2 per cent in 2010. I hope the government's forecasters are right but my hunch is it's going to be much longer before the rebound begins. Which, in turn, could delay British Columbia's recovery.

B.C. likes to point out that of all the Canadian provinces it is the least reliant on trade with the United States. It does far more business with Asia (27.1 per cent) than Ontario (2.6 per cent) or Alberta (5.8 per cent). But I'm not sure B.C. is going to be able to count on a roaring trade relationship with Japan over the next few years. Things are deteriorating rapidly there and are slowing pretty dramatically in China as well.

All this is to say some of B.C.'s key economic forecasts for this year and going forward might be optimistic. Take the real GDP growth for this year. The budget predicts it will be minus 0.9 per cent. I believe the contraction will be greater as well.

There's a fascinating section in one of the B.C. budget documents that looks at previous recessions and economic downturns the province has endured. Particularly interesting is the comparison between the current economic crisis and the recession of 1982.

Back then, real GDP in the province shrunk by an astounding 6.1 per cent, compared with the minus 0.9 per cent predicted for this year. The unemployment rate in B.C. was 12.1 per cent, compared with the 6.2 per cent it is expected to average out at this year. Exports are expected to fall by 2.4 per cent this year compared with a whopping 5.4 per cent in '82.

“The downturn going into 2009 is unlike the 1982 recession,” the budget notes.

“But the present economic weakness in the global economy threatens to continue for several years with the risk to the Ministry of Finance's current forecast weighted to the downside.”

Which brings us to a third way of looking at this budget.

Not only could things be a lot worse, they could still become so.


Budget sets some important benchmarks for tough months ahead

Editorial
Vancouver Sun
February 18, 2009


In tough circumstances, Finance Minister Colin Hansen has produced a provincial budget that on paper is impressive.

But it comes with a list of caveats and uncertainties that rightly emphasizes that the course of the provincial economy over the year ahead is far from certain.

The surprisingly small deficit of $495 million for this fiscal year reflects not just a change in philosophy from a government that previously outlawed red ink, but an election-eve conversion from conservative budgeting to a bottom line that is imbued with a strong sense of hope that B.C.'s economy will rebound next year.

Given the recession into which the world is sliding, Hansen's budget paints a picture of a provincial economy and government finances still in relatively good shape. Compared to other provinces and G-7 countries, we certainly are.

Hansen anticipates the economy will shrink by just under one per cent in 2009, which is more conservative than what his panel of private sector economists forecasted. But he also acknowledges that the rate of decline over the past few months has confounded all of the previous projections.

Since the first quarterly report on the province's finances in September, the three-year projection for revenues has declined by $6.6 billion.

The government is also rushing in a stimulus plan that will ramp up capital spending by $2 billion over the next three years beyond the $10.6 billion in approved projects.

Those indicators would suggest a much larger deficit for the coming year than $495 million, given that the projected surplus in last year's budget was $800 million. But after years of presenting budgets with large forecasting allowances and conservative revenue forecasts, the cushions in this year's budget are more thinly supported.

There is no forecast allowance and provisions previously in the budget for future wage increases have been removed. There are also $250 million in spending cuts that have yet to be identified. That is in addition to almost $589 million in cuts -- with the exception of education and health -- ministries have already been told they will have to endure.

The budget also notes that health authorities have identified significant spending pressures that are not included, but will blow the budget if they cannot be contained.

All of this creates a bottom line for the government that more than ever depends on sound management and the ability to adjust to changing conditions.

As a starting point, however, this budget sets some important benchmarks for navigating through the tough months ahead.

First, the ramped up spending and the borrowing that goes with it are modest enough to allow the province to anticipate it will stay below the debt-to-GDP level that earned us a triple A credit rating.

That ratio may deteriorate if the economy continues to shrink. If so, the government's definition of what is affordable will also have to be amended.

The three-year plan calls for a smaller deficit next year and a return to surplus in year three. Adherence to that plan is as important as the budget for the current year because it represents our last line of defence against the deficit addiction that created the debt crisis of the 1990s.

Second, despite the fact that this is an election budget, the government has resisted the temptation to blow the doors off the treasury with spending promises that would haunt us in years to come. As it is, we can still expect the ramped-up capital spending will provide a steady stream of announcements between now and the official start of the campaign in April.

Realistically, given the state of change in the world, we all have to understand that the province's budgets may need to be modified on a more frequent basis than we're used to. It's quite possible that a new plan will be needed after the election.

But it is also a document that the Liberals can and will proudly carry into battle as evidence of the sound economic management they have delivered over the past eight years.

online

Poll question: Do you think the government can balance the budget in three years time? Answer Yes or No at vancouversun.com/opinion

You're not optimistic when it comes to the province's proposals to address gang violence. Fully 87.76 per cent of respondents to Tuesday's Opinion Web poll said the provincial government's plans won't be effective, while only 12.24 per cent said they would.

© Copyright (c) The Vancouver Sun


If, if, if -- modest deficit budget ripe for revision if things don't work out

By Vaughn Palmer
Vancouver Sun
February 18, 2009

As budget day approached, the B.C. Liberals were contacted by several members of their independent forecasting council who wanted to reduce their projections for economic growth. Again.

Council members had downgraded their forecasts for 2009 on several previous occasions, from two per cent on average, then one per cent and finally zero at the beginning of January.

Each time the revisions sent the government back to the drafting table on its own budget.

By law, the budget is grounded on the collective outlook of the dozen or so members of the council. In practice, the finance ministry averages the forecasts, then picks a growth rate slightly lower than the collective view.

These latest revisions would drop the council's forecast into negative territory, though only just. The experts were now saying the economy would shrink by about three-tenths of one per cent, or half a billion dollars worth of gross domestic product.

Too late, came the answer from the ministry of finance. Not that government doubted that the economy was sliding into recession. But the budget preparations were too far advanced for one more substantial revision.

And in any event, the ministry -- with its preference for lowballing -- was working from an expectation that the provincial economy would shrink by nine-tenths of one per cent (-0.9), a bit more than the running average from the outsiders.

But that still meant the Liberals were leaving themselves little room to manoeuvre on the budget and fiscal plan that was presented to the legislature Tuesday.

If "minus zero point nine per cent growth" turns out to be an optimistic scenario, if the economy continues to slide through the summer into the fall, if the U.S. recovery is postponed indefinitely . . . well, there's little doubt that the B.C. government will be forced to substantially revise the three-year budget and fiscal plan.

Even if the forecast turns out to be no more than accurate, the budget derived from it sets up major challenges for government.

First of all, the Liberals have to sort out the financing for the $3.3-billion Port Mann bridge project. The deal isn't final, so the budget came with a big asterisk saying "more later."

They also have to take the wraps off their "secret" plan to cover the provincial share of the cost of security for the 2010 Winter Olympics. Supposedly it is all taken care of in the budget.

But the Liberals flatly refused to say where the dollars are hidden. Their lips are sealed until an announcement from Ottawa in a week or so. So much for budget transparency.

Next challenge: The Liberals are calling on ministries and dependent agencies to "manage down" spending by about $2 billion over three years, reducing discretionary spending on travel, consultants, advertising, vehicles, equipment and grants.

Then they have rustle up another $250 million in savings from sources yet to be identified. If all of that were to come from staffing, it would mean across the board layoffs of about 10 per cent of the public service, although five per cent is a more likely figure.

While cutting overhead, operating and other expenses, most ministries will have to make do with minimal to non-existent increases in program funding over the three years. Health got most of the new program dollars -- a six-per-cent increase -- and still faces "spending pressures" amounting to a further 3.3 per cent.

Presuming the government endures no more shocks on the revenue side, makes the spending targets, finds the additional savings and contains the pressures, then it will be able to hold the line at a deficit of just $500 million the first year (beginning April 1) and $250 million in the second.

Most observers, me included, figured that when the Liberals decided to leave balanced budget territory on the eve of an election, they would go for bigger deficits. In for a penny, in for a billion, so to speak.

Instead they went small, in keeping with their stated dislike of deficits and determination to end them as soon as possible. But that was only on the operating side of the budget, where spending for programs is supposed to be offset by incoming revenue from taxation and other sources.

It was different story on the capital side of the budget, where the Liberals continue their practice of borrowing heftily for roads, bridges, transit lines, schools, hospitals, transit, hydro and other public works.

The collective provincial debt, mostly capital-related, is projected to grow from $40 billion in the first year of the B.C. Liberal plan to $47 billion in the third. Up from $33 billion just two years ago, or 40 per cent in five years.

All in the name of "infrastructure," though the preferred term these days is "economic stimulus." Note that billions will be borrowed and spent in 2010 and 2011, by which time the Liberals say the economy will be growing again and less in need of taxpayer-funded stimulus.

But if the economy isn't back on track by this time next year, then I expect the 2009 budget will have been declared a dead letter.

By these guys, should they win re-election. By the next government, should they fail.

vpalmer@direct.ca

© Copyright (c) The Vancouver Sun

Posted by Arthur Caldicott on 18 Feb 2009