A BC budget surplus of $865 million next spring


B.C. Finance Minister Gary Collins presented the provincial government’s quarterly financial report on September 14, 2004.

Finance Minister Collins:
“Larger budget surpluses in the years ahead will provide British Columbians with more choices and more opportunities to realize their vision for our province, Finance Minister Gary Collins said today in releasing the Budget 2005 Consultation Paper.

“B.C.’s revitalized economy is generating a string of healthy and growing budget surpluses,” said Collins. “We want to hear from British Columbians about their priorities and their suggestions for what the government should do with the available funds.”

Collins says government could offer “more tax cuts, increase program spending or cut the debt”.

Responses: “The rosy financial report was warmly received by the business community, but social groups and the Opposition New Democrats said many British Columbians were hurt by government cuts.” (Canadian Press)

One opinion:
“Darcy Rezac, Vancouver Board of Trade spokesman, said the government is wise to slowly weigh its options for the surplus funds. “The fact that we do have a modest surplus shows it’s time to pause and reflect and see where we are,” he said. The business community doesn’t have a set wish list, but paying down the debt and reducing the provincial sales tax are longstanding priorities, Rezac said.

More opinions: “I would say at least $500 million should be spent on income assistance, both in terms of people’s eligibility and in terms of the rates,” said Michael Goldberg, research director for the Social Planning and Research Council of B.C. He said his No. 2 priority would be restoration and enhancement of child care: “I would say right off the bat that would be at least $200 million this year and then grow significantly in subsequent years. “The third thing would be restoration of community-based services for children and families.” (Vancouver Sun, Sept. 15, 2004)

David Schreck on BC Politics
Sept. 15, 2004

“Collins is doing his best to spin a myth that BC’s expected surplus is due to a robust economy. When asked about his tax hikes and service cuts, he responds with jargon about the need to put our fiscal house in order. Those who are paying $1,000 a year more in MSP premiums have every right to think that their payments created the surplus. Those who are looking at higher heating bills are unlikely to think its great that the government is getting a windfall profit from higher natural gas prices. No amount of political spin will hide the fact that the expected surplus is due to tax hikes, service cuts and high natural resource prices. The Campbell government may get a few cheers from the six figure set who reaped the big tax payoff, but most British Columbians have a sense that the gains and the pains were not fairly distributed.”

From monster deficits to monster surpluses: What happened?
By Marc Lee, Canadian Centre for Policy Alternatives
COMMENTARY: September 16, 2004

The recent announcement by Finance Minister Gary Collins that BC is now expected to post a $1.2 billion surplus in 2004/05 caught many by surprise. After all, it was only seven months ago that Minister Collins tabled his first balanced budget, after sky-high deficits the previous three years. What explains this dramatic shift from red to black?

The Minister credits a more robust provincial economy, which he attributes to his government’s economic program – tax cuts, deregulation, privatization. This story would make sense if it were not for the inconvenient fact that it is not true.

The government’s projection for economic (real GDP) growth for 2004 was raised by only a tiny amount in the updated forecast – from 2.8% to 2.9%. This is hardly enough to cause such a major change in the budget’s bottom line.

While the BC economy has definitely recovered from a recession in 2001, it is not exactly “sizzling,” as some recent newspaper headlines have suggested. Economic growth of 2.9% is not spectacular by any kind of historical benchmark. It is a middling growth rate that does not pack the kind of punch needed to substantially expand employment or increase wages.

On the employment front, a low interest rate environment has done more for BC than tax cuts, by stimulating the housing market and residential construction. A hot housing market also increased Victoria’s revenues by $168 million in property transfer taxes.

Employment growth improved in 2003 and 2004, although it is still middle-of-the-road by historical standards. Other employment indicators are little changed from pre-2001 patterns. On a regional basis, most employment gains have been concentrated in the Lower Mainland and Victoria.

Outside of residential construction, new capital investment in machinery and equipment and new facilities – the harbinger of future productivity growth – has been weak. This is a major indictment of the government’s program.

As a result, projections for tax revenues that are directly linked to economic performance, such as personal income tax and sales tax, have increased only slightly since the budget was tabled in February and do not contribute much to the total revenue gain of $1.2 billion. Moreover, personal income tax revenues are still significantly lower than they were in 2001 before the government introduced its tax cuts – meaning that tax cuts have not paid for themselves.

So, where did the big money come from? The budget’s bottom line got a huge boost from rising commodity prices. Lumber prices are close to record highs, up about 50% since budget time. This has meant an additional $375 million in revenues for the BC government.

Natural gas prices are also higher than projected at budget time, for an extra $203 million in revenues. Higher energy and mineral prices added another $117 million in revenues. Together, higher resource revenues account for 60% of the budget’s revenue gain for 2004/05.

Higher revenues have also come as a result of increased federal transfers for health care (up $166 million), and this does not count the new money that will come to BC as a result of the latest federal-provincial health care summit.

BC’s post-secondary students chipped in an additional $95 million above what was expected at budget time due to higher tuition fees. Revenues from student fees are a jaw-dropping $350 million above what was collected back in 2001/02 – before the government lifted the tuition freeze.

What is truly alarming is that even though BC finds itself flush with cash, the $350 million in spending cuts announced at budget time in February have not been reversed. (One exception to this is the budget for forest fires, which is $120 million over its budget of $55 million.)

Since 2001/02, ministries outside health care and education have borne a total spending cut of $1.9 billion. That the government now has a surplus of $1.2 billion tells us that even with the lost revenues from tax cuts, the government could have spared BC the pain of two thirds of these spending cuts and still had a balanced budget this year.

If a large portion of today’s surplus is because yesterday’s spending cuts were too deep, the people who carried the burden of the spending cuts should have dibs on the surplus. This means restoring cuts to child welfare, social assistance, child care subsidies, and environmental protection to name some of the more pressing needs in the province.

The Finance Minister is right that BC is now in a position to make choices about how to disburse the expected surplus. But he is wrong about his government’s economic program. Most of the explanation for the budget surplus comes from factors – low interest rates, high commodity prices, stronger demand for BC exports – that are beyond the control of the provincial government.