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Why Are We in the Money?

B.C.'s monster deficit has become a monster surplus, but not for the reasons the Liberals suggest.

Marc Lee 20 Sep

Marc Lee is a senior economist at the Canadian Centre for Policy Alternatives’ B.C. office who researches and writes on a variety of economic and social policy issues.

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The recent announcement by Finance Minister Gary Collins that B.C. 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 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 percent to 2.9 percent. This is hardly enough to cause such a major change in the budget's bottom line.
While the B.C. 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 percent 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 B.C. 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.

World markets deliver the goods

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 percent since budget time. This has meant an additional $375 million in revenues for the B.C. 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 percent 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 B.C. as a result of the latest federal-provincial health care summit.

Tuition rise steep

B.C.'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 B.C. 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 B.C. 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 B.C. 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 B.C. exports -- that are beyond the control of the provincial government.

Marc Lee is an economist in the B.C. office of the Canadian Centre for Policy Alternatives.  [Tyee]

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