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February 19, 2013

Budget Strains Credibility

Immediate news on the 2013-14 BC budget naturally focuses on unexpected tax increases: the 10% corporate tax rate increases to 11%; a "temporary two year" 2% increase in income taxes for those making over $150,000, a 4% increase in MSP premiums and a $2 per carton increase in cigarette taxes. Three of those four measures might have been expected in an NDP budget.

For weeks reporters and pundits have cast doubt on the credibility of the Liberal pre-election budget. Notwithstanding the tax increases, it remains doubtful whether the budget is truly balanced. The Liberals have damaged their credibility so severely that, according to a leaked government document, $4.1 million (tax dollars) will be spent on two new government budget ads designed to try to decrease their "credibility gap" (and help them cling to power). The ads will probably repeat endlessly that the budget is balanced, whether you believe it or not.

The only thing that will resolve the debate over whether the budget is balanced or not is the audited financial statements, but they will not be available for fiscal 2013-14 until June or July 2014, 16 months from now and well after the election. In the meantime, Premier Clark has to ask a doubting public if they are willing to trust a government that didn't mention the HST until a few weeks after the last election.

The 2013-14 budget includes a forecast allowance of just $200 million and a reserve for contingencies of $225 million. In 2008-09 the forecast allowance was $750 million and the contingency reserve was $375 million. It looks like government uses these accounts like the old Social Credit BS fund to adjust the bottom line to the number it wants.

The Budget Transparency and Accountability Act specifies what the government must provide when it tables its budget, including a detailed list of assumptions, the report of its Economic Forecast Council and a forecast for the two fiscal years following the budget year. In accordance with those requirements, the 2012-13 budget which was tabled in February 2012 estimated that government revenues would total $44.603 billion in 2013-14 and $45.711 billion in 2014-15. Those estimates included $475 million from "release of surplus assets" in 2013-14 and $231 million from asset sales in 2014-15. The 2013-14 budget lowered the estimate of government revenue to $44.387 billion for 2013-14 and to $44.986 billion for 2014-15. It stuck with the $475 million figure for 2013-14 asset sales and lowered the estimate for 2014-15 asset sales to $150 million. A detailed list of what assets might be sold is not available.

As part of its exercise in reducing its credibility gap, the government hired former BMO chief economist Tim O'Neil to comment on the reliability of the budget's revenue estimates. He cautioned that the government should lower its assumption on the price of natural gas.

A discussion of natural gas prices can get very confusing because prices are quoted in different currencies, in several different units of measurement and at many different delivery points. It is a challenging task to compare prices that are not quoted on the same basis with respect to those variables, but Appendix 6 in the budget documents makes that chore easier by providing two dozen private sector price forecasts and converting all of them to $C/gigajoule at plant inlet. This is important because, according to the budget documents, a $1 change in the price (expressed in those terms) equals a plus or minus $234 to $250 million impact on the budget. Table 2 in O'Neil's report compares budget assumptions on the price compared to the actual price from 2000-01 through 2011-12. It shows significant negative errors in six years; the second quarter financial report for 2012-13 indicates this year will be the seventh for a significant negative error.

In last year's budget the government assumed the price of natural gas would be $2.52 in 2012-13, $3.04 in 2013-14 and $3.56 in 2014-15. That was an 8% increase over 2011 and a 20% increase for each of the next two years, with the consequence of pumping up the assumption for government revenue in 2013 by over $150 million.

This year's budget assumed the price of natural gas would be $1.46 in 2012-13, $1.85 in 2013-14, $2.25 in 2014-15 and $2.65 in 2015-16. Those are very optimistic assumptions for year to year price increases, but they are consistent with private sector forecasts provided in Appendix 6 of the budget documents.

It is doubtful whether any government will be able to withstand the spending pressures created by the budget. As political pressure mounts something is likely to give. The 2013-14 health budget is $16.551 billion, a 2.3% increase from 2012-13. The budget documents contain a section titled "Bending Down the Health Spending Cost Curve". Many health economists would argue that it will be challenging to maintain services in the face of population growth, an aging population and technological change while bending down the cost curve, although virtually everyone would like to succeed in that challenge. It will take the co-operation of all health care providers to meet the challenges.

The government is reducing the budget for advanced education at the same time it says it recognizes the need to train for tomorrow's jobs. Both university presidents and students are not likely to take that news quietly.

The government has lost in court in their attempt to eliminate the ability of teachers to negotiate class size and composition, yet block funding to school districts is frozen. The BCTF quickly objected to what it saw for education in the budget.

The stage has been set for what the Liberals probably hope will be an election debate over balanced budgets. It is not clear whether that debate will be vote determining for enough people so as to make a difference. With their credibility challenges that debate might backfire on the Liberals because we got into our current situation as a result of twelve years of Liberal rule.