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Record Deficit a Big Surprise, Say BC Liberals

During May's election Hansen learned revenues were hundreds of millions of dollars lower, but lacked a 'crystal ball'.

By Andrew MacLeod 2 Sep 2009 | TheTyee.ca

Andrew MacLeod is The Tyee's Legislative Bureau Chief in Victoria. Reach him here.

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Off by factor of five: Premier Campbell and Finance Minister Hansen presenting last February's fiscal update.

British Columbia Finance Minister Colin Hansen is projecting a record deficit of $2.8 billion, according to a budget update he presented today. It's a figure five times larger than the $495 million projected in February and insisted upon by Premier Gordon Campbell during the election campaign.

While Hansen said the re-write was necessary because of the deteriorating global economy and the unexpected severity of the recession in B.C., observers said as early as February that the government's numbers were unrealistic.

"This downturn we've seen in the last 12 months is hopefully a once in a lifetime experience," said Hansen. "Hopefully we are through it, but I don't think anybody has that crystal ball."

In March, 2008, the Tyee reported there were signs an economic slump was coming to B.C. but the government appeared to be doing little to prepare. In February the Tyee's Will McMartin called Hansen's budget "toxic fudge" as it overestimated revenues and underestimated expenses in several areas.

On budget day Green Party leader Jane Sterk predicted the real deficit would be much larger than Hansen said at the time. "I find it astounding the minister still says they didn't have an inkling the deficit would be this large, because we did call it back in February."

What Liberals knew when

Hansen himself managed to add to speculation that he knew more during the election about how bad the financial situation was when he told reporters that he knew during the election that revenues were tanking.

He said: "The first time that I ever had any indication from ministry of finance staff that our revenue projections might be taking a bigger hit than we anticipated was actually a casual conversation I had in the middle of the election where the deputy minister indicated to me, as an aside actually of a relatively brief discussion, that our revenues may be under pressure to the tune of about $200 or $300 million dollars from what we had previously anticipated."

Several hours later Hansen appeared alongside Campbell in a scrum in the premier's office.

Campbell said that when he insisted the deficit figure was firm, he believed it was true. "What I actually was doing was reporting on what I knew at the time," he said. "I was not frankly aware of what the impacts were in terms of revenues and I think frankly a lot of people weren't. There were a lot of projections, no question about it."

He said a week or so before the election he'd heard the revenues were dropping, but he thought the drop was manageable. "I'd also heard we could manage them within the budget framework we'd set."

"Anyone following the papers would know there were going to be pressures on revenues," Hansen said.

At the time he didn't worry, he added, because he knew the government was finding places to save money. "The first thing that popped into my head was that was still doable within the budget framework we'd set for ourselves."

Asked when exactly he had the conversation with deputy finance minister Graham Whitmarsh, Hansen said he didn't know. "I don't keep a diary."

"I don't buy it," said New Democratic Party leader Carole James. "First of all it's worrisome that a minister takes a comment in passing that revenue is dropping and he doesn't worry about it? He should be paying attention to those things on behalf of British Columbians."

Revenues kept dropping

Regardless, Hansen's post-election budget is a major revision from what he presented in February. It shows a drop of $1.2 billion in revenues and an $826 million rise in expenses.

February's budget overestimated the government's revenue in 2009-2010 from personal income taxes by $881 million, from corporate income taxes by $114 million, natural gas royalties by $492 million and other natural resources by $561 million.

It introduces a tax on the private sale of used vehicles which will raise $75 million in 2010-2011 and $101 million in 2011-2012. Medical Service Plan premium revenues are up $37 million since the February budget and are slated to increase by 18 percent over the next three years.

"We are moving to make sure the most critical services are protected," said Hansen. The increase in MSP premiums is "necessary to keep health spending sustainable," he said.

Liquor distribution branch revenue will go up thanks to increased markup. Prices will stay the same for alcohol at government liquor stores, despite the fact the budget reduces taxes on it.

Altogether the government has revised its revenue projections downwards by $1.2 billion.

'Prudence' added back in

At the same time, expenses are up $826 million from February's budget. The update includes an added $420 million more for income assistance over the next three years, $80 million this year for H1N1 flu preparation and $151 million to implement full-day kindergarten.

It also adds in a $250 million forecast allowance and an extra $115 million in contingency funding. The government's documents say including a forecast allowance is "prudent". In past years the allowance has been in the range of $750 million, but in February, when the global economy was particularly volatile, the government allowed nothing for it.

The deficit is reduced thanks to the $1.6 billion transition payment the federal government will pay to B.C. as part of the adoption of the HST. Of that, $750 million will be applied to this year's bottom line with the rest spread over the following two years.

The government also took the update as an opportunity to revise ministry budgets, upping the allocation from what was presented in February to Aboriginal Relations and Reconciliation by 35 percent, Forests and Range by 43 percent and Healthy Living and Sport by 23 percent.

Cuts since February include a 19 percent hit to the Environment Ministry, 19 percent to Small Business, Technology and Economic Development, 25 percent to Agriculture and Lands and 41 percent to finance.

Counting on a rebound

The budget documents show a projected decrease of 1,083 in the number of people working for the government over the next three years and make no allowance for possible wage increases. Most public sector unions have contracts that will expire in 2009-2010.

The budget documents also acknowledge that the province was already in recession in 2008. At the time government officials said B.C. was largely insulated from the global economic downturn.

"There's every indication we're seeing a bottoming out of this economic downturn," Hansen said today. There's still a possibility there'll be a "double dip" and the economy will worsen, but the assumption in the budget for future years is the GDP will grow. "It's going to be a slow, gradual recovery."

The update is based on the assumption that the real GDP will shrink by 2.9 percent in 2009, then grow by 1.9 percent in 2010 and 2.7 percent in each of 2011 and 2012.

Old economy vs. new economy

Cutting spending and introducing new taxes and higher fees is the wrong approach in a downturn, said B.C. Federation of Labour President Jim Sinclair. "It's killing jobs," he said. "It's going to cost you and me and the average British Columbian more to get by on."

He added, "I think British Columbians have a right to be angry today. They saw a budget that goes against what they need." The HST will transfer wealth from the pockets of average British Columbians to corporations, he said.

CUPE B.C. President Barry O'Neill said people keep saying the government made hard choices. "Bullshit. Those are the easiest choices you can make," he said. "It's all just take back, very small amounts from people who need those amounts."

The budget cut the new economy and reinvested in the old economy, said Will Horter, executive director of the Dogwood Initiative. "We knew the government was going to have to make hard choices," he said. "We have serious concerns about some of the choices they've made."

While the budget maintains the carbon tax, it also excuses home heating costs from the HST.

"Putting the tax exemptions on fuels rather than putting the tax exemption on renewable energy products shows you're going in the opposite direction from the carbon tax," said Tom Hackney from the B.C. Sustainable Energy Association. "Renewable energy should be exempt from the HST."

"It puts the lie to the claim they are protecting the environment," said Horter.

The reaction is a big change from February 2008 when environmentalists lauded the carbon tax. "Politics is about eternal vigilance," Horter said. "What have you done for me lately... This budget shows they haven't done much for the environment and future generations lately."  [Tyee]

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