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February 21, 2012

Correction: The natural gas prices assumed in the Alberta and BC budgets are almost equal; they appear different because BC's is on the basis of plant gate price while Alberta's is on the basis of distribution hub.

Liberal Credibility - Budget 2012

When Finance Minister Kevin Falcon stood in the legislature February 21st to present his budget for 2012-13 and forecasts for two further years, he knew British Columbians won't see audited results until July 2013, two months after the election. Budgets are as much political statements as lists of figures. If the last Angus Reid poll is correct, Premier Clark's government is in danger of being devastated with 27% of those who voted Liberal in 2009 now intending to vote for the BC Conservatives. Her budget may have been an effort to court that lost vote, but Conservative Leader John Cummins was quick off the mark attacking the budget, and getting himself in the news cycle. The damage to the Liberal brand may be so severe that no budget trickery can erase it.

Liberal budget figures suffer from the credibility gap Gordon Campbell created when he promised one thing before the 2009 election and surprised everyone just weeks afterward. All that can be certain about Falcon's budget are things that can be experienced before the May 14, 2013 election. Those include: The untestable assertions in Falcon's budget include a 2.5% increase in total expenditures after repaying the federal government for the HST transition funds, and a 2.8% increase in total revenue for 2012. For the election year he projected further increases of 0.8% in expenditures and 3.5% in revenue. You canít bet on those figures being even close to accurate; as usual, it looks like the Ministry of Finance under-estimated revenue. It is also unlikely that expenses can be controlled as shown in the budget without a backlash the Liberals will find intolerable. Weíll see three more presentations of provincial financial figures, in September, November and again next February with another budget, but none of those numbers will be subject to an audit until after the next election.

As suggested in the days leading up to his budget presentation, Falcon's budget included a forecast that his 2013-14 budget will be balanced, despite the loss of almost $500 million per year windfall the government received when it admitted the HST was not revenue neutral. It will be July 2014 (14 months after the election) before we see audited financial reports for that key election budget.

Governments of all political stripes hope that economic growth will allow them to escape the hard alternatives of raising taxes or cutting services. Ontario is facing a deficit crisis; its $17 billion deficit is forecast to balloon to $30 billion if numerous drastic cuts aren't made, or taxes raised. Alberta, by contrast, projects its 2012-13 deficit of $886 million to disappear in 2013-14 as government revenue grows by 10 percent per year for the next two years, led by phenomenal growth in revenue from bitumen. Falcon's projected revenue growth is less than a third of Alberta's; he must worry about natural gas prices.

The 2012-13 Alberta budget assumed natural gas prices would average $3.00 (Can$/GJ), while the last BC budget assumed $3.60 for 2012-13. Alberta assumed $3.50 for 2013-14; BC assumed $4.20. BC budget documents indicate that for every $1 change in the price of natural gas, government revenue changes between $315 million and $365 million. Falcon's 2012 budget reduced assumed prices to $2.52 for 2012. The budget document said: "In 2013/14, natural gas royalties are expected to increase by 64 per cent due to higher volumes, prices, and an increase in gross royalty rates, which reach their maximum when prices are above $3.00 CDN per gigajoule (at plant inlet)." For this year, if Alberta is right that the price will average $3.00, the government will have about $180 million more in revenue than indicated in Falcon's budget.

In his 2011-12 budget, Falcon assumed real GDP would grow by 2.0% in 2011, 2.6% in 2012 and 2.7% in 2013. This year Falcon lowered the assumed GDP growth to 1.8% for 2012 and 2.2% for 2013. Provincial budget documents indicate that for every 1% change in nominal GDP, government revenue changes between $150 million and $250 million. The difference in Falconís GDP growth assumptions between 2011 and now accounts for about $120 million less revenue this year.

Falcon's budget shows provincial debt increasing to over $66 billion by 2014, but that does not include "off-book" debt (remember Enron) shifted to BC Ferries or deferral accounts at BC Hydro, let alone billions in contractual commitments for those P3 projects so favoured by the Campbell-Clark government. The growth in debt, from $33.9 billion in 2001, makes many people shake their head and further question Falcon's figures.

Adrian Dix would be wise not to commit to what an NDP government would do until he has the benefit of not only seeing provincial financial data from the 2013 budget, but also seeing other economic data over the next year. In the meantime, we will continue to see the Liberals strain their credibility by not only making untestable claims about their situation but also making claims about what an NDP government would do. It will come down to who the voters are willing to trust.