Last week’s “status quo” provincial budget could be a springboard for a spending spree of promises from the BC Liberals leading up to the next provincial election in 2013.
While the budget provides for more than $1 billion in contingency funds to give the next premier and executive council “flexibility” in spending priorities over the next two years, an even greater windfall may be available if B.C.’s economy grows much faster this year than the government is predicting.
Budget figures released last Tuesday are based on an ultra-conservative economic growth forecast of only 2% of real GDP growth in 2011, 0.7% below the forecast by the government’s Economic Forecast Council (EFC). It projects growth of only 2.6% in 2012 compared with the council’s 3% forecast.
Bruce Hurst, chairman of the Certified General Accountants of BC, called the low forecast financially prudent.
But he added “while I wouldn’t call it a worst-case scenario, it certainly takes into consideration a lot of possibilities of things going wrong.”
The ministry cites a variety of downside risks to its forecast, including:
- continued weakness in the U.S. economy;
- slower-than-expected global demand;
- a greater-than-anticipated slowing in the housing market; and
- the sovereign debt crisis in Europe.
While many analysts don’t expect any of the issues to be a concern this year, some might benefit B.C. The European sovereign debt crisis, for example, has been an advantage for more financially stable government debt issuers like Canada and the provinces by helping to keep bond yields relatively low (see “Canadian homebuyers will benefit if these PIIGS don’t fly” – issue 1103; December 14-20, 2010).
The ministry’s forecast for its interest rates on long-term debt is expected to rise 0.33% in 2011 and a further 0.57% in 2012. That’s far less than the 2% increase in the Bank of Canada rates forecast by most economists over the next two years that primarily affects personal and commercial lending.
The relatively low increases in debt-servicing costs for the province will help keep its taxpayer-supported debt relatively affordable over the next few years. That will keep B.C.’s debt-to-GDP ratio below 18% over the next few years.
But the budget did not address the impact of the HST referendum, which could deal a financial blow to the government.
While Victoria would have to spend tens of millions reinstating the administration of the PST and repaying the $1.6 billion advanced from Ottawa, reversion to the PST and GST could cost the government hundreds of millions of dollars in sales tax revenue.
It would also affect business competitiveness by leaving B.C. with the country’s highest marginal tax rates.
Said Hurst: “There would be a huge price tag associated with that.”