Beware the false fiscal alarm

The headlines were predictable and the message clear -- BC could be staring down a $5 billion deficit unless dramatic action is taken. But a closer look shows that such grim prospects are greatly overstated.

The BC Fiscal Review Panel rang a false alarm this week about the state of provincial finances. Like the 1993 Alberta Fiscal Review Panel, the BC report claims the good ship British Columbia is headed for a sea of red ink if we do not change course. This raises the spectre that the report will be inappropriately used to justify spending cuts and privatization by the new government.

The Panel report comes on the heels of a balanced budget in 1999/00 and an anticipated surplus of $1.3 billion in 2000/01. The final NDP budget in March 2001 projected a balanced budget for 2001/02. So what gives?

Interestingly, if the Liberals had hoped the Panel would hang the previous government for its budgetary sins, they must be sorely disappointed. The Panel report states that the estimates in the last NDP budget were "reasonable given the information available at the time." After combing through the books, the Panel actually increased the much-maligned projected BC Hydro income from $300 million to $375 million, in effect saying that the NDP estimate was too low. And the Panel commended the measures taken by the NDP to increase budget transparency and accountability, calling BC a "leader in Canada in terms of its implementation of Generally Accepted Accounting Principles in the public sector."

Where things get fuzzy is over the next two budgetary years, for which the Panel claims that the fiscal plan in the 2001 Budget was overly optimistic. But it would seem that the Panel's revised view goes in the opposite direction -- it is hyper-pessimistic and highly speculative.

The 2001 budget forecasted revenue growth of 2.3% in 2002/03 and 2.6% in 2003/04 -- pretty conservative numbers. But the Panel projects that revenues in 2002/03 will actually decrease (even before accounting for the latest tax cuts). This is hard to believe, since the last time revenues fell was during the Great Depression. If BC were on the verge of a deep recession, this projection might be plausible, but the Panel notes that the average estimate for real economic growth in 2002 is 2.9%, nowhere close to recession.

The alleged revenue drop stems from much lower projected resource revenues, specifically for natural gas. This suggests a dramatic fall in natural gas prices that would put revenues back at pre-1999 levels. However, the Panel does not supply any evidence to this end. Recent price forecasts for natural gas do suggest a slight decrease in natural gas prices from their peak in 2001, but all see them staying high compared to any previous year on record, due to the thirst for energy south of the border and long lags in getting new supply on-line.

In effect, the Panel adopts a worst-case scenario when it comes to estimating revenues and expenditures, creating a false sense of crisis. The Panel then factors in massive forecast allowances, amounting to $1.1 billion in 2002/03 and $1.25 billion in 2003/04. These revenue cushions account for over one-third of the Panel's projected deficits in each year.

The recently announced tax cuts worsen this fiscal picture. The Panel makes no attempt to back the Liberal's pre-election claim that tax cuts will increase government revenues. Indeed, they project a resulting revenue loss of $1.15 billion this year, and a loss of $1.5 billion in each of the next two years.

The upshot of all this: BC is not facing "structural deficits" anywhere near $5 billion. Rather, it is the tax cuts that undermine our fiscal situation.

The Panel argues that slashing spending is not the proper response to its perceived crisis. But the danger in such a pessimistic outlook is that irrespective of the Panel's opinions the ball is in the government's court. Alberta received similar advice in 1993 (also based on mistaken estimates of energy prices), then imposed unnecessary hardship on the people of that province due to its infamous cutbacks. BC should not make the same mistake.