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July 18, 2011

Public Accounts 2010-11

The government's financial statements are called the Public Accounts. Unlike the budget, quarterly financial statements or various background documents, a portion of the Public Accounts is certified by the Auditor General. While much of the Public Accounts is not audited, I've never heard anyone question the accuracy of the unaudited components of the accounts. The Public Accounts are the closest thing you will see to the stringent reporting requirements for public companies.

Companies whose stock is traded, or who raise money in traded bond markets, have to meet far more stringent disclosure requirements than the government. That is how the details of David Hahn's pension were made public; reporters looked at BC Ferries filings on SEDAR.

The Public Accounts for the fiscal year ended March 31, 2011 were released on July 18th. While the accompanying government news release compares the year’s results with the previous year and with the budget; an equally important comparison is to the last year before the recession. Government revenue declined for two years after a peak of $39.744 billion in fiscal 2007-08; it bounced back to $39.926 billion in 2010-11 but not due to recovery of pre-recession revenue sources.

Revenue from the federal government was 35% higher ($2.065 billion) in 2010-11 than in pre-recession fiscal year 2007-08, including a one-time $0.769 billion in HST transition funding. The only other increases were 12% ($0.47 billion) for fees and licenses and 9% ($0.231) for miscellaneous income. Compared to 2007-08, 2010-11 taxation revenue was down 6% ($1.209 billion); natural resource revenue was down 27% ($1.014 billion) and investment income was down 26% ($0.296 billion).

Today's release provided an update on estimated HST revenue that showed it to be just $5 million more than estimated in the third quarter financial report released in February 2011. For the first nine months with the tax, July 1, 2010 through March 31, 2011, it raised (net of credits) $4.176 billion, $392 million (9.4%) more than was forecast when the 2010-11 budget was tabled in February 2010, five months prior to the implementation of the tax. That suggests that we can put considerable faith in the $5.820 billion projection for annual net HST revenue for 2011-12 that was in this year’s budget. That projection is $0.444 billion more than forecast for 2011-12 in the 2010-11 budget, and just over half the figure provided in the Dinning report for excess HST revenue. The difference appears to be that the often quoted $800 million plus figures in the Dinning report include full repayment of the federal HST transition funds. Repayment, if it were to occur, is a one-time item (although perhaps spread over several years), while the excess revenue is a flow that goes on forever. It is important to understand that “excess” HST revenue is tax that BC families are paying; $0.444 billion works out to an average of about $220 per family in addition to previously estimated HST costs which were based on the original figures.

On the spending side, the 2010-11 Public Accounts revealed total spending of $40.235 billion an increase of 8.8% compared to 2007-08 pre-recession spending of $36.998 billion. The government spins the release of its accounts as good news with a lower deficit than previously forecast; an alternative view is that the figures show increasing reliance on the federal government with taxation and natural resource revenue still far behind pre-recession levels and spending, criticized for not meeting needs, continuing to outpace revenue. Keep in mind that some of the reduction in taxation revenue is a result of tax changes introduced by the government since 2007-08.

In late September the government will release the first quarter 2011-12 financial report, covering April through June 2011. That report is not always an accurate predictor of how the province will finish the fiscal year, but it is the best we are going to get when looking for indicators of the state of the province’s finances.