November 6, 2008

Election Economics

The Budget Transparency and Accountability Act requires the Minister of Finance to make public his Second Quarter Report no later than November 30th. In 2007 the Minister chose to wait until the last possible day before releasing the report, which happened to be a Friday, the day the government prefers for bad news. This year November 30th falls on a Sunday, so it is likely that the report will be released on Friday, November 28th.

If the Campbell government makes its surplus disappear, it will be more difficult for Carole James to say how she will finance her election promises, most notably the elimination of the carbon tax, while maintaining the corresponding personal income and business tax cuts. Of course, rather than accounting assumptions, it could be the economy that makes the surplus disappear, but it will be very difficult to separate the two until long after the May election. According to Appendix 1.5 in this year's First Quarter Report, on an annual basis a plus or minus 1% change in nominal consumer expenditure equals a plus or minus $25 million change in government revenue. A plus or minus $1 change in natural gas prices equals a plus or minus $275 million to $325 million in revenue. A plus or minus 10% change in interior forest harvest volumes equals a plus or minus $50 million to $75 million in revenue. While lots of other revenue sources are listed in the appendix with their "sensitivities" to underlying assumptions, it is interesting that no sensitivities are listed for the property transfer tax. In September revenue from the property transfer tax was revised downwards by $120 million. That was before things got really nasty in the real estate market.

At October's Liberal convention in Whistler, Premier Campbell announced that assessments would be frozen at 2007 values and that homeowners with at least 15 percent equity could defer their property taxes (borrow that amount from the government as a lien against their home at interest rates that change every six months). Are those announcements an indication that the Premier thinks the economic downturn is much deeper in BC than he or his Finance Minister previously indicated? Freezing assessments creates winners and losers; those with homes that have decreased in value more than average end up paying higher property taxes because of the freeze. Is Campbell interfering with the BC Assessment Authority in order to shield himself from the concern of homeowners when falling assessments might have raised their alarm? It is cheaper to borrow several thousand dollars by deferring property taxes at the interest rate charged by the government, than it is to borrow at the bank. Does Campbell think that credit is so tight in BC that the government needs to expand its participation in the lending business? It could be that these announcements have everything to do with May's election and little or nothing to do with the economy. Just like the credibility of budget forecasts, it will not be possible to separate the need for meddling with home values from election campaigning.

Campbell seems to be sending conflicting messages. On the one hand he claims that BC is in the best position in North America to weather the economic crisis, but on the other he is saying that BC homeowners need a bailout. The Second Quarter report should make for more interesting reading than normal.