BC Budget 2009 – Analysis

Posted February 18, 2009 by Sacha Peter - Link
Category: Analysis Comments (2)

After reading the 162 page document, BC Budget 2009 is remarkable for what was not included in it, rather than what was in it. This was a “stay the course” document, not designed to ruffle too many feathers before the election, coupled with some measures that are fit with the economic situation. The tax measures can be summed up as a “continuation of previously enacted tax measures”, while the spending measures can be summed up as “spending an extra couple billion on capital projects, plus another billion thrown into health and education for good measure”.

This budget document tries to be everything to everybody, by announcing spending increases to health and education, no new taxes, capital spending, and no layoffs of government employees, with the cost of being a minor deficit. On initial glance, it appears to be a communications document, rather than a strong policy document since the underlying estimates do not easily hold up to detailed scrutiny.

Here are some thoughts. I am not looking at the 2010-2011 plan or beyond, since I think these numbers are pure guesswork and will be completely remodeled in six months’ time when the political pressure of an election is not on the finance department.

* The deficit amount, $500 million (very astutely reported as $495 million), is relatively low. However, coupled with this is a projected increase in debt of about $3 billion, or about 7.7% of projected revenues. The $2.5 billion difference is the difference between the capital expenses for the year ($6.9 billion) minus amortization of previous capital projects (note this is a general explanation; Table 1.20/1.21 provides the proper reconciliation which is too technical to explain here). The reason why the debt is increasing faster than the deficit is because the government generally does not treat capital expenditures as expenses, unlike the federal government. The reason why things are done this way delves into an accounting topic of BC’s adoption of Generally Accepted Accounting Principles (GAAP) and the accounting principles that Ottawa uses, and is beyond the scope of this website. As I have pointed out earlier, the government will try to focus on the minor increase in government operating debt, when the more relevant measure is taxpayer supported debt (up $2.5 billion).

Just imagine trying to explain the previous paragraph on a television camera, and you can see why the government chooses this route to present the numbers – the numbers are unattackable in a 5 second sound-bite. Example of soundbites: $495 million deficit (lower than expected!) and $3 billion debt (We’re building things and keeping people employed!).

* The major changes to revenue estimates for the 2009-2010 year from the previous year include higher personal income tax collections, lower corporate income tax collections and natural gas royalties. One reason for these rosy estimates include an expected increase of 2.4% real GDP (4.2% nominal) which I would think is quite high. The federal government in its budget also makes a similar assumption. 2009 has a -0.9% real GDP reduction projected.

* On the expense side, as previously discussed, health and education spending are up, while everything else is steady or down. The finance ministry is hardest hit, with a 1/3rd cut in the budget. Tourism, Sports and the Arts is also down, but this was planned well in advance. I wonder why finance was so hard hit – they are a department which provides very good information for external stakeholders such as myself, and seem to be competent at their jobs.

* Page 30, table 1.12 has an amusing dialog of projected future Olympic spending – apparently $96 million is the province’s commitment in the 2009-2010 fiscal year, with a $10 million contingency. This contains nothing with respect to the province’s share of security costs, which will inevitably raise costs on this portfolio considerably. Table 1.23 describes the $856 in unallocated contingency spending as it relates to the Olympics over the next 3 years, and it is likely that a large degree of this will be taken up with the security cost, net of proceeds from the federal government.

* Tables 1.13 and 1.14 show that the government expects to realize about $600 million a year in “administrative savings”, by reducing hiring consultants (the major line item; $177 million) and discretionary grants. The media item piece is the reduction of informational advertising, down $23 million, but is the highest on a percentage basis (76%), which is undoubtedly why you will hear this one mentioned most often when it comes to “finding savings” even though on an absolute dollar basis it only provides 8% of the identified $297 million of savings.This leaves the question of – how is the government going to find the other $300 million in administrative savings? I think the answer is obvious – even though they said they won’t be doing it, they will probably lay off people after the election is over. This is strongly hinted to in Jessica McDonald’s letter as follows:

· As the budget implementation planning proceeds in each ministry, every effort is being made to consider direct staff impacts only as a last resort. Some seasonal or on-call auxiliary terms will naturally come to an end in different ministries over the next while. Other than these positions, and the senior executive reductions recently implemented, we do not expect any staff layoffs or terminations to occur in the next few months as a result of budget reductions. Instead, as referenced above, we will be working to find opportunities for staff to keep working and for the organization to adjust to delivering services as a smaller organization. I want to be clear that these plans will contemplate opportunities for both regular employees and auxiliaries.

· If, at the end of this planning process, staff layoffs do occur, you can be assured that it will be the smallest number of individuals impacted possible. Speculation has occurred over the past couple of weeks that these numbers could reach as high as 20% of the workforce. As I have stated before, these reports are inaccurate. What we know at this stage is that direct impacts will definitely be under 5%, including both regular and auxiliary employees. However, we believe the number could ultimately be much lower than that. We will be able to more accurately gauge the number of potential impacts over the next few months, and we will share this information with you to keep you apprised.

I know that if the BC Government said at this point they will be getting rid of employees, that there would be an unroar. Election time is always political, and I do not think the government was successful at hiding this move as to where they will be able to find $300 million.

* Capital spending is being ramped up, to provide jobs for those that can work on such construction projects, plus to be eligible for as much federal infrastructure grant money as possible. This is a good headline maker for the government, and one can be sure to bet on announcements relating to projects in swing-type ridings (e.g. the Evergreen Line construction will likely be the focus of a future press release). This one will be a PR winner for the government, especially as announcements are rolled out over the next two months.

* The economic sensitivities in this budget are nicely outlined in Table 1.22 and A10; essentially there is a lot of sensitivity to natural gas prices, GDP and lumber. Again, although the government has done some research and chosen conservative numbers (e.g. the Economic Forecast Council has a projected real GDP growth of 0% in 2009 vs. BC’s -0.9% assumption), there is material risk on the revenue side.

This budget is a relatively safe document politically; while I think there are considerable risks with respect to realizing revenues, any shortfall will only be established after the election. There are plenty of soundbites in this document that were obviously crafted for communication purposes (e.g. the 3/4 reduction in “information advertising” and the job creation potential of infrastructure spending increases). While the province does dig three billion dollars into the bank account to fund such ventures, and pull a deficit at the same time, it will likely not cost itself politically until after the election is over.

Whoever is running this province after the election, however, is likely to come back and tell the public “We were a little optimistic with this budget” and the dreaded “we need to make cuts, or raise taxes”. But after the election is when these announcements will happen, whether it is from the BC Liberals or NDP.

There is still plenty in the budget, or rather not in the budget – such as spending on police/prosecutors (on the crime issue). However, the NDP’s continued claims of “spending cuts on health and education” is clearly lying – the government has dramatically increased the health budget (32%), and slightly increased the education budget (9%) since five years ago (i.e. comparing 2004/2005 vs. 2009/2010 projections).

Politically, the NDP discussing these three issues (health, education and crime) will not win the election; they will not attract new voters. Their strategy is probably better spent discussing credibility (e.g. how the “Balanced Budget Law” was broken) and run the reverse of what the BC Liberals did in 1996 with former NDP finance minister Elizabeth Cull’s “fudge-it-budget” (which subsequently carried over into the 2001 campaign). This would also include how the NDP would propose running a balanced budget for 2009/2010 – using the government’s assumptions. This would create a very interesting turnaround – the NDP portraying themselves as fiscally conservative with balanced budgets vs. the BC Liberal government having to break their own balanced budget legislation.

The BC Liberals politically have showed a bit of their hand with the budget – a campaign to keep the deficit/debt at a manageable level, spend money on infrastructure and keep people employed while building tangible structures for the province. Will their strategy work? Probably. However, they have left themselves open to attack as pointed out in the previous paragraph. Also, one would suspect that if they had repealed the carbon tax it would have sealed the election for them.