June 3 , 2009

Government Revenue Falls

When the province tables an updated budget, it should show increased expenditures for health and welfare and less revenue, hence a deficit that is bigger than the $495 million that was the bottom line in the version tabled in February.

The government is far from transparent when it comes to sharing financial information with the public. Public Accounts (the audited financial statements) are released in late June or early July, a First Quarter Report is released in September, a Second Quarter Report is released in November and a Third Quarter Report is released together with the new budget in February. In election years, a revised budget is introduced two or three months after the May election. Apart from some of the figures found in the Public Accounts, most of the numbers are more subject to change than your typical 5 day weather forecast; the budgets and quarterly reports are just estimates. The government could help private sector forecasters by releasing monthly data on sales tax receipts, hotel tax receipts and other such revenue figures that are collected as a routine part of administering provincial taxes. Some financial officials have access to those data but not the general public.

The federal government provides useful information in its monthly "Fiscal Monitor", released at the end of each month. Anyone who follows the news knows that on May 26 Finance Minister Jim Flaherty warned that Canada's deficit could top $50 billion, up from $33.7 forecast in January. The Fiscal Monitor reported that Canada's budgetary revenues for March 2009 decreased by $3.1 billion, or 14.4 per cent, relative to March 2008. Corporate income tax revenues were down 46.8%; personal income tax revenues were down 12.4%. For the 12 months ended March 31, 2009, total federal personal income tax revenues were up 2.4%.

In a few weeks we'll see BC's Public Accounts for the fiscal year ended March 31, 2009, but even then the personal income tax numbers will be subject to change. It is not unusual to see prior year adjustments in excess of $100 million, a feature of the federal-provincial tax collection agreement. In addition to those uncertainties, comparing revenue from different tax years is complicated by tax changes. Table 1.6 in last February's budget provides a basis for consistent comparison of personal income tax revenue after adjusting for changes in tax rates and the carbon tax. It showed an estimated 4.9% increase in personal income tax revenues for the year ended March 31, 2009. If BC's personal income tax take follows the federal take, there will be a shortfall of $166 million for the year just ended. For the fiscal year that began on April 1st, the adjusted personal income tax was estimated to increase by 2.8%. If the 12.4% drop in March personal income tax revenue for Canada is any indication of what lies ahead, BC could see a revenue shortfall in excess of $700 million just on personal income tax. On June 5th the May Labour Force Statistics will be released. If BC continues to show substantial job losses, it will increase the likelihood that the personal income tax revenue shown in February's budget was vastly overestimated.

In 2007, personal income tax accounted for approximately 17.9% of total provincial revenue. The revenue items which make up the other 82.1% of provincial revenue are also subject to downward pressures. Table 1.5 in February's budget listed major factors underlying revenue forecasts. For example, in February it was assumed that provincial GDP would decrease by 0.9% in both real and nominal terms, in other words a GDP implied price index of zero. Central 1 Credit Union (C1CU) commented on the preliminary GDP figures for 2008 and concluded:

"The outlook for B.C.'s economy this year is not good. C1CU forecast real GDP will shrink by approximately 3% while nominal GDP drops by more than 6%. Every sector is expected to weaken except for government spending and government investment. Rapidly declining investment in housing construction and business investment will lead the economic contraction. A very modest recovery is forecast for 2010, while a return to normal rates of economic growth is unlikely before 2012."

BC's economy is much softer than Premier Campbell has acknowledged, and the implications for government revenue are bad.