Budget 2011: False Deficit and Carbon Tax Smokescreen

Colin Hansen refused in his budget speech yesterday to "set out new directions." Those, the finance minister stated at the outset of his remarks, would have to come from "the next premier, who will set the course for the next decade of growth and opportunity for this great province."

That next premier will be chosen by the BC Liberal party in 10 days time, on Feb. 26. And whoever that person is, it is entirely possible he or she will decide to seek, as soon as is practicable, a mandate all their own.

British Columbians, in other words, may go to the polls well before the scheduled date of May 14, 2013.

Would the new premier, leader of a political party that claims a special competence with regards to the province's finances, dare to face the electorate with a deficit on the books? For Hansen's budget for fiscal 2011-12 contains (see page 1 here) a shortfall of $925 million -- the third consecutive deficiency from a government that took power in 2001 with a pledge to "outlaw" red ink from the province's books forever.

If British Columbians hold a general election this fall, in other words, could B.C.'s new premier produce a new and "balanced" budget beforehand?

The answer is: of course, certainly. And that's because Hansen was true to his word -- he didn't set out any "new directions." A new direction for a BC Liberal finance minister would have meant, after all, honestly depicting the province's finances.

The new premier, thanks to Hansen's 2011-12 fiscal plan, will have many pathways to a balanced, pre-election budget.

Watch the magic shrinking deficit

Let us start with the fiscal period just ending, 2010-11. One year ago, Hansen's budget put the anticipated deficit at $1.715 billion. Because of prudent BC Liberal fiscal management, however, he now pegs that figure at $1.265 billion.

Actually, it's only half of that latter figure, and here's why.

The current fiscal year ends in just seven weeks, on March 31. Yet Hansen has decided to keep (in the updated forecast) his entire "contingencies" vote for the year, which is $450 million.

To date -- over the first 45 weeks of the fiscal year -- only $140 million of the contingencies vote was spent, leaving a balance of $310 million.

How likely is it that the entire amount (or any) of that $310 million will be expended in the next seven weeks on (as it states in the fiscal plan) "pressures related to litigation, caseload, natural disasters, and other contingent items"?

Not very. All of it will be used on March 31 to reduce the deficit.

Similarly, Hansen only cut in half his "forecast allowance" -- from $300 million to $150 million. Again, what is the likelihood that Victoria will face an urgent necessity to spend the remaining $150 million over the next seven weeks? Little? None?

Combined, these two items brings the deficit for the current year down from $1.265 billion, to $805 million. A little boost to revenues, a teensy suppression of expenditures, and by year's end the 2011-12 deficit will be half (or less) of Hansen's projections.

More figure fiddling

Now to the up-coming fiscal period, 2011-12 (which starts on April 1). As stated earlier, Hansen's budget yesterday calculated a shortfall of $925 million over the year.

(This is bigger than the revised deficit for the year just ending, which as explained above should be about half of $1.265 billion -- or $630 million or so.)

But Hansen's budget for next year contains a forecast allowance of $350 million, plus a whopping big contingencies vote of $600 million. Combined, the two measures of prudence add up to $950 million -- or $25 million more than the anticipated deficit (and hundreds of millions above this year's shortfall).

The removal or reduction of these two spending items produces -- voila -- not just a balanced budget, but a surplus.

Is it possible for the next premier to remove or reduce both the forecast allowance and the contingencies vote? Think back to Hansen's pre-election 2009-10 budget, when he wanted to make the deficit as small as possible. In that fiscal plan, he had a forecast allowance of nothing (zero, zip, zilch) and the contingencies vote was a relatively puny $385 million.

(In a nutshell: Back in the spring of 2009, at the depth of a global economic downturn -- and on the eve of an election -- Hansen and the BC Liberals decided that the appropriate level of fiscal prudence was just $385 million. Today, with a global recovery well underway -- and a desire to create as much leeway as possible for the next premier -- they've decided to boost their forecast allowance and contingencies vote to $950 million. It's not unlike putting on a condom after sex.)

Is it possible for a new premier to alter the forecast allowance and contingencies vote? Of course.

The bottom line

Are there other clues in Hansen's latest budget that might reveal how the next premier could produce a balanced budget in the coming fiscal year? As stated earlier, the government might decide to goose revenues or dampen expenditures.

Let's look at an example of the former. Under GAAP (generally accepted accounting principles), the province's budget includes the net income of Crown corporations. (Not the Crown's total revenues and expenditures; just their annual profit.)

The Liquor Distribution Branch is an important source of revenue for the provincial government. As the Crown's current service plan states: "LDB net income in [sic] an important source of funding for the provincial government and accounts for approximately 2.4 per cent of total government revenue."

In 2009-10, during the nadir of the economic downturn, the Liquor Distribution Branch contributed $877 million to the province's bottom line. (For sake of comparison, that's about the same as is provided by the property-transfer tax.)

Hansen's latest budget shows that LDB net income for the current year just ending will be $897 million -- or an increase of only 2.3 per cent over a year earlier. Yet, across the province, retail sales in 2010 rose by 4.3 per cent, and current dollar GDP grew by 5.6 per cent. Why are profits at the Liquor Distribution Branch doing so much worse than the provincial economy?

Even more puzzling, LDB net profits are forecast to continue growing at a leaden pace: 3.1 per cent, 2.3 per cent, and 2.2 per cent over the next three years. Meanwhile, retail sales across the province will grow at about twice that pace over the same period.

Is the government deliberately suppressing LDB income for budgetary -- and political -- purposes, or are British Columbians becoming abstemious? (If you chose the latter, you haven’t been paying attention.)

Anyway, the bottom line is, the bottom line is easily manipulated. It's the one thing we've learned over the last decade of BC Liberal budgets, and Hansen's latest effort confirms the practice.

Carbon tax smokescreen

As British Columbians anticipate a new premier, and possibly prepare for a snap general election, Hansen's budget provides a useful reminder as to why the business sector is so solidly behind the BC Liberals.

It often is said that businesses don't pay taxes. They merely pass on those and other costs to their customers.

But if that's true, why are businesses getting the bulk of the tax cuts intended to keep B.C.'s carbon tax "revenue neutral"? Shouldn't individual consumers get most -- and maybe all -- of the carbon-tax rebates if they're the ones who actually pay (in the end) the environmental levy?

That's not the way the BC Liberal party sees it, for as is clearly shown in Hansen's 2011-12 budget (see pages 45-46 here), individuals soon will get barely one-third of the carbon tax rebates, while the portion allocated to businesses soars to two-thirds.

A little background. Back in May 2008, then finance minister Carole Taylor explained that the government had found "a rare consensus. . . among individuals, certain business groups, environmental organizations and economists that a carbon tax is a key tool in the move to reduce [greenhouse gas] emissions. . . "

But she added this explicit caveat: ". . . provided that the additional revenue is recycled to taxpayers through reductions to other taxes."

Taylor later emphasized that latter point: "[T]he tax will be revenue-neutral. All revenue from the tax will be returned to taxpayers through tax cuts."

In its first year of implementation, the new carbon tax -- levied mostly on gasoline, and paid by consumers at the pump -- was expected to generate $338 million.

An identical amount, $338 million, was returned to B.C. taxpayers in the form of tax cuts in other areas -- $217 million for individuals and families (from rollbacks in personal income tax rates, plus other things), and another $121 million earmarked for businesses (primarily a reductions to corporate income taxes).

Was that split fair? Well, let's ask another question.

Who pays the carbon tax? The fact is, no one knows for sure. It's not evident, when a motorist fills his or her gas tank, whether that purchase was on behalf of an individual or a company. No one collects that sort of data.

Still, on its face the split in 2008-09 looked to be fair: individuals got 64.2 per cent of cuts intended to offset the carbon tax; and businesses took 35.8 per cent. And, let's not forget: businesses pass their tax costs onto their customers, so even a third of the cuts was a significant gift to the private sector.

But much has changed in two key areas over the last three years.

First, the tax cuts intended to keep the carbon levy 'revenue neutral' have, in fact, far outstripped the income generated by the environmental impost.

In its second year, 2009-10, the carbon tax raised $542 million, but the off-setting tax cuts totaled $729 million. That left a shortfall of $187 million. For the year just ended, 2010-11, carbon tax income is forecast at $740 million, but rebates add up to $862 million, leaving a deficiency of $122 million.

This trend, according to Hansen's latest budget, will continue over the next three years. The carbon tax is expected to produce $950 million in the up-coming fiscal period, followed by more than $1.2 billion in each of the following two years. The related tax cuts will be even larger, however, resulting in deficits of $191 million, $328 million, and $242 million.

Simply, the carbon tax is less than revenue neutral. The monies it generates fail to cover the tax reductions intended to maintain equilibrium.

Businesses gain more than individuals

The other change is even more noteworthy, for businesses have been taking an ever-increasing share of the carbon tax offsets -- and that amount will grow even larger in coming years.

Recall that individuals received 64.2 per cent of the carbon tax rebates in the new levy's inaugural year. The next year, 2009-10, that figure was down to 49.2 per cent ($359 million of $729 million).

It was even less in the year just ending, 2010-11, a mere 45.8 per cent ($395 million of $862 million).

And it gets worse over the next three fiscal years. In 2011-12, individual consumers will take 41.8 per cent ($477 million of $1.1 billion) of the carbon tax rebates, followed over the next two years by 33.0 per cent ($493 million of $1.5 billion) and 34.5 per cent ($508 million of $1.5 billion).

What to make of all this? First, 'revenue neutrality' actually means that the provincial treasury loses monies every year from the carbon tax, because the off-setting tax cuts cost more than the environmental levy generates.

Second, individuals and families are paying an ever-increasing portion of the carbon tax.

And that raises a final point: is the carbon tax merely an earlier version of the much-hated Harmonized Sales Tax? Specifically, is the carbon levy just another way to shift the tax burden from businesses to individuals -- but under the guise of environmentalism?