BC Budget 2009 assumptions already failing

Posted March 13, 2009 by Sacha Peter - Link
Category: Economy Comments Off

I remarked in my analysis of the BC Budget that “… the underlying estimates do not easily hold up to detailed scrutiny.” which was a reflection of the assumptions that were made by the government to project future revenues. It is more likely than not that after the election, the government will be releasing a revised forecast showing worse-than-expected estimates. Some of the budget sensitives and the impact on their revenues are here:

Some other assumptions for revenue include:

Personal/Corporate Income Tax – A tax base growth of +1.3% for personal income tax, while the corporate tax base is forecast to drop by 18.2% (a decrease in profits of 24.7%). Because of increasing unemployment, the tax base might be shrinking this year. Also, due to significantly less profitability of BC companies (especially due to commodity market drops) the estimate in the decrease of the tax base might be less than 18%, but again, this strongly depends on commodities.

Provincial sales tax assumptions include an increase of 1.9% of consumer expenditures. Suffice to say this might be high.

Property Taxes – 25,541 housing starts were projected, a 26% decrease from last year. This decrease is probably not high enough – for the first two months in calendar 2009, housing starts are down significantly higher than the 26% projected. For example, in Vancouver, 2,446 starts were in February 2008, while there were 701 in February 2009.

A natural gas price of US$5.96/MMBtu; currently the spot price is about US$4. Crude assumptions are US$56.39 at Cushing, right now it is about US$47. The natural gas assumption seems high; while the crude assumption is slightly high but not unreasonable (but certainly not conservative). I would like to see finance minister Colin Hansen buying natural gas futures (on his own money, not the province’s!) if he thinks the US$5.96/MMBtu assumption is accurate.

The Lumber commodity price assumptions, and currency projections appear to be on target with what current spot prices are.

Other economic proxies such as unemployment and GDP are projected to be 6.2% and -0.9%, respectively. The unemployment rate has already reached 6.7% in BC in February 2009, with a 65.8% participation rate. The BC Budget also assumes a 66.2% participation rate. The trend in unemployment is unlikely to abate, especially with the slowdown on construction starts.

The budget numbers implicitly assume that a significant economic recovery will occur by the end of the year. Certainly they can, but it highly depends on the state of several key inputs as outlined above – companies hiring and people working (and paying income taxes), spending (collecting PST), and all of this in BC depends on housing starts and high commodity prices. If crude can go from $150/barrel to $35/barrel in less than half a year, it could go the other way as well. Or maybe not.

This is why economic forecasting is such an art – even if you get things right, it just might be through sheer accident. But the conclusion of this post is that it is more likely than not that the province will not be able to achieve its revenue projections for the 2009 fiscal year, given the data that we are seeing presently. The next government will have to make a decision whether they want to post a further increase in the deficit, or whether they will want to take revenue measures (raise taxes) or expense measures (decrease spending). A tough decision for sure, but only one that will be made after the election and guaranteed to cause media (and opposition) scrutiny.

My guess right now is that the 2009 deficit will be about $1.2 billion, given what we currently see. If housing starts drop to 50% of the previous year’s level, and we see unemployment go up to 8-8.5% (which is not entirely unreasonable), then we might be looking at about $2 billion.