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July 9, 2012

No Verifiable Finances

As British Columbians went into polling booths for the 2009 election, they had no idea the Liberals would announce the HST two months later and they had the Premier's reassurance that despite world economic trouble BC's deficit would not exceed $495 million. That promise proved to be wildly off, with public accounts recording a deficit of $1.8 billion for the fiscal year ended March 31, 2010. Based on that pre-election experience, how much credibility can anyone have in the financial figures, or any promise, offered by the Liberals before the May 14, 2013 election? We will be treated to three quarterly financial statements, the 2013-14 budget and 2013-16 fiscal outlook between now and the election.

Finance Minister Kevin Falcon is already creating uncertainty over his figures. Vancouver Sun columnist Jonathan Fowlie reported Falcon said BC will suffer a $200 million hit to revenues this year because of falling natural gas prices, but Falcon went on to say that BC could gain $500 million due to 2.3% GDP growth exceeding his earlier low-ball forecast of 1.8% for 2012. Unfortunately, data on provincial GDP is only available on an annual basis. The initial estimate for 2012 won't be released by Statistics Canada until April 2013, about four weeks before voting day and two months after the next budget is tabled. Statistics Canada will revise its provincial GDP estimates in the fall of 2013. This year's budget (page 45, table 1.23) said that a 1% increase in GDP would have a fiscal impact of $150-250 million. Falcon referred to an increase of 0.5% so it is challenging to see how he goes from an impact of $75-125 million to $500 million, but this is Liberal economics in a pre-election period. Perhaps the Finance Minister was referring not only to GDP, but also to all other revenue sources. Remember we won't see the audited financial statements for the current 2012-13 fiscal year until July 2013, so little or nothing from this point to the election is verifiable.

Unions currently bargaining with the province no doubt share Falcon's hope that his early pessimism for revenue growth may be wrong. The First Quarter Financial Report should be released in early September; if it confirms Falcon's latest optimism, it will make it difficult to understand why he can't follow in Carol Taylor's footsteps and find a reasonable settlement with BCGEU. If it reverts to his earlier pessimism, it will create doubts about government rhetoric with respect to the promise of a balanced budget.

Those who are betting on Falcon's optimism shouldn't look too closely at his last budget. In addition to the smaller impact of higher GDP growth, those who pour through the documents will discover an assumption of rising natural gas prices: $2.52 $Cdn/gigajoule this fiscal year, $3.04 next year and $3.56 in 2014-15. That's a questionable assumption in a world awash with shale gas; just Google "China shale gas". It is challenging for all but a handful of experts to examine natural gas prices because prices are quoted in different units (gigajoules, MMBTUs, Mcf), different currencies and different points of delivery. Table A6 in this year's budget documents gives a range of forecasts and adjustments to $Cdn/gigajoule. When you see natural gas prices quoted in the news, they rarely state units or delivery point. Plant inlet $Cdn/gigajoule is about 70% of the often quoted Henry Hub US$/MMBtu. Google "nymex henry hub us$ mmbtu" and you will see why the Finance Minister has a lot to worry about with respect to his revenue forecasts.

In view of these financial uncertainties, it is no wonder Adrian Dix and the NDP are reluctant to release a fully costed platform before Falcon tables his budget. Even then it will take a great leap of faith to pin platform costing to any set of reliable financial numbers; of course all parties face that problem with the Liberals facing the additional challenge of a major trust and credibility gap.