September 14, 2002

First Quarter 2002-03 Highlights Welfare Cuts

Finance Minister Collins has reported that based on the first three months of this fiscal year, revenue on an annual basis is now expected to be $228 million more than estimated in February. $100 million of that is because of a bigger handout from Ottawa and $58 million is because of a bigger grab from BC Hydro. A section near the end of the report explains that the $100 million increase in forecast equalization payments is unreliable. Hydro released its own first quarter report two days before Collins' report, and revealed that it would have to come close to exhausting its rate stabilization fund. Now we know that this is to satisfy the demands of the government for more revenue. Nowhere in his report did Collins explain why the government is taking more from Hydro.

On the expenditure side Collins said that on an annual basis expenditures will be $190 million less than he originally forecast. $107 million of that is because of cuts to welfare.

It probably doesn't surprise anyone that Collins released a report showing that revenues are up, expenses are down and that he expects to finish the year with a lower than originally forecast deficit (although still the biggest in BC's history). It is no surprise that the primary reason for reduced expenditures is a harsh welfare system; it is a surprise that the primary reason for increased revenue is because of higher equalization payments. The combination of revised forecasts for revenue and spending, however, is less than 2% of government's $25.4 billion in spending. Nevertheless, the revisions are in what some would call the "right" direction unless you are one of the people in a health queue or a food bank lineup. There is no evidence in the report that tax cuts are paying for themselves.

The term "quarter" gets a little confusing when reading the financial report. The fiscal year runs from April 1, 2002 through March 31, 2003 so the first quarter of the calendar year is the fourth quarter of the fiscal year and the first quarter of the fiscal year is the second quarter of the calendar year. The report released on September 12 covered government revenues and expenditures for the period April 1, 2002, through June 30, 2002, hence it is called the First Quarter Report.

Like all first quarter reports, Collins' missive spends more time discussing revised annual estimates than it does discussing actual revenues and expenditures for the first quarter. It sets the stage for a discussion of revised annual estimates by looking at various economic indicators. Based on positive growth in a half dozen indicators including employment measured by the Labour Force Survey, retail sales, housing starts and non-residential building permits, Collins revised his forecast for growth in real GDP from 0.6% to 1.4%. Despite the improved outlook, BC's forecast growth is less than half of the expected growth for the Canadian economy.

The optimism displayed in upward revisions for economic growth is not translated into higher income tax revenues. In fact, the report shows first quarter income tax revenues as being on target and it notes that annual income tax revenues are expected to be $50 million less than forecast (on a base of $4.8 billion) due to "lower-than assumed personal income tax assessments for 2001 based on preliminary tax assessment information provided by the federal government." Upon the receipt in 2001 of an unexpected $630 million in retroactive income tax payments from the federal government (which should have been received in the NDP years), the Campbell government had hoped that a higher tax base would mean higher future revenues. It is surprising that despite claims about employment growth, the forecast for income tax revenue was lower than the February forecast. This is evidence that the tax cuts will not pay for themselves. Income tax revenue was $6.02 billion in fiscal 2000-01. Economic growth is not expected to be sufficient to drive it back up to that level before the next election.

The property transfer tax is expected to bring in $82 million more than originally forecast, but despite boasts about growth in retail sales, tax revenues are forecast to improve by only $10 million on a base of $3.8 billion (less than one third of one percent).

On the spending side the information in the First Quarter Report differs significantly between the revised annual numbers (page 28, table 2.4) and the actual first quarter numbers (page 52, table A.3). The revised annual numbers show changes of $3 million under budget for the referendum, $107 million under budget for welfare and $80 million under budget for debt servicing. No other area has had its spending forecast revised. The first quarter numbers show spending to be less than forecast in all Ministries except Labour. The explanation given for the difference between the revised annual forecast and the first quarter numbers is that spending in most ministries is simply postponed until later in the year. We don't know whether that is the result of cutting too deeply at first or simply bad forecasting.

One of the most interesting sections is found in a four page discussion of equalization payments. Collins has repeatedly blamed the former government for allowing BC to become a "have not province". In this report a more objective description of the equalization program is given. The report goes into length to explain how estimates of equalization payments are volatile and how they are not finalized until 30 months after the fact. It also notes that:

According to the Premier's strategic plan for BC "Our goal is for British Columbia to have the best performing economy and the highest quality of life in North America." Apparently that goal is not going to be met in the foreseeable future. In the meantime a lot of people are paying the price for Campbell's big tax gamble.