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Remember the NDP’s Supposed $5 Billion 'Structural Deficit'?

The story behind the big headlines that served their purpose four years ago.

Will McMartin 14 May
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Campbell's panel was stacked with Lib donors

West Vancouver’s Tim Duholke is a respected chartered accountant who has an ownership interest in numerous public and private companies, including lumber remanufacturing, the cellular telephone industry, clothing manufacturing and distribution, technology, and much more.

Duholke also has more than a passing interest in politics. In May 2000, for example, in anticipation of the general election that put Gordon Campbell in the premier’s office, one of his companies, Ayers Capital Corp. (later transformed into CHK Wireless Technologies Inc, and now GridSense Systems Inc.), donated $2,250 to the B.C. Liberal party.

Fast-forward to early 2005. With another general election in the offing, Duholke thought he had more to offer than merely cutting a cheque for the Liberal party, and so put his name forward for the nomination in West Vancouver-Garibaldi, his home riding made vacant when Ted Nebbeling opted to retire.

But Duholke was out-manoeuvred by Liberal back-roomers who favoured former polling maven Joan McIntyre. They ruled that Tim could neither sell memberships nor make speeches to the party faithful, and to no one’s surprise, Joan had handily bested Tim when the ballots were counted.

It was a shabby way to treat a loyal party supporter. But Duholke was much more than that, for in the early days of the Liberal government, he had served on the Fiscal Review Panel, an "independent" body appointed by Campbell to examine the province’s finances.

Despite the fact that Campbell received briefing binders from finance bureaucrats stating that the defeated NDP government had left a record-breaking surplus of $1.5 billion on the province’s books (a fact later confirmed by the auditor general), the new premier was loath to acknowledge or credit his political foes’ fiscal policies.

Duholke and his panel colleagues obliged by providing Campbell with an analysis alleging that B.C. faced a future deficit — three years after the NDP was turfed from office — of more than $5.2 billion. Armed with this "independent" report, Campbell and the Liberals repeatedly declared they had "inherited" a horrendous "structural deficit" from the incompetent New Democrats. That assertion, unquestionably reported by the news media, is passionately believed by many British Columbians.

Commission of friends

Campbell and the Liberals had won the election with a New Era platform pledging "a comprehensive audit of the province’s finances within 90 days" of forming government. The Liberal leader also suggested that the size of his promised "dramatic" tax cut depended on the audit’s findings: "It would be irresponsible for me to suggest what the tax cut will be," said Campbell, "until I know what the status of the books are."

So on May 25, 2001, nine days after winning B.C.’s biggest-ever legislative majority, Campbell appointed a commission to conduct "an independent review of the province’s fiscal situation." Heading the panel was Gord Barefoot, a chartered accountant and executive at B.C. Gas Inc (later renamed Terasen), which along with its affiliates and subsidiaries contributed about $40,000 to the B.C. Liberals in the five years leading up to the 2001 general election. (And much more since.)

In addition to the chair and Duholke, at least two other members of the Barefoot panel also either owned or worked for companies that made sizeable cash contributions to the B.C. Liberals. The "independence" of the commission certainly was open to question.

But mere days after being appointed, the panel’s utility or value also seemed questionable. On June 6, Campbell and finance minister Gary Collins announced a 25% cut to personal income tax rates. With the financial audit barely got underway, the Liberals brought in tax cuts which cost the provincial treasury $1.5 billion annually.

If neither "independent" nor necessary, just what was the purpose of the fiscal review panel?

There is an old political tradition in British Columbia, whereby newly-elected governments attempt to discredit their defeated predecessors for alleged fiscal incompetence. The Socreds and NDP have done it, and so have other parties. Usually it involves some sort of review by accountants (see sidebar at end of story).

So Gordon Campbell and his newly-elected Liberal government merely followed history when they appointed Barefoot, Duholke and the others to conduct an "independent" review of B.C.’s finances.

Tough case to make

But a unique challenge faced the Barefoot panel. The B.C. Liberals took office at the beginning of June 2001, just two months into the new fiscal year. The books for 2000-01 were closed, under audit, and could not be retroactively altered.

Even worse for the new government, when the 2000-01 public accounts were made public, they would show that the defeated NDP had left the biggest surplus in B.C. history. It would not be possible for the incoming Campbell government to claim they had inherited a deficit from the New Democrats based on audited financial statements.

Moreover, fiscal 2001-02 was already underway. But the budget estimates had not been passed, and an ‘interim supply’ bill provided funds only until the end of July. The Liberals, therefore, had to return to the legislature and obtain approval to spend monies for the balance of the fiscal period. How was it possible to claim that the NDP had created a massive deficit when they had been in power for mere weeks of the fiscal year, and the B.C. Liberals for the remaining 10 months?

Barefoot, Duholke and their colleagues found an innovative solution to this dilemma. Unable to cite a New Democratic Party deficit for the past or the present, they skillfully projected a massive shortfall for the future. In other words, they ignored the previous fiscal year, 2000-01, and the current year, 2001-02, and instead created a NDP deficit for 2003-04 — three years after the New Democrats had suffered defeat.

They started with a three-year forecast of the consolidated revenue fund from the NDP’s final budget, cutting revenues by about $1 billion while raising expenditures by about $1.5 billion. In effect, where the NDP’s three-year forecast showed a balanced budget in 2003-04, now was a deficit of $2.52 billion.

Then they turned to the ‘forecast allowance.’ This device was introduced in the late 1990s to act as a fiscal ‘cushion.’ (It was not intended to be spent, but counted as an expenditure at the beginning of the fiscal year should a potential shortfall in revenues or an unplanned expense arise.) Most NDP forecast allowances were about one-and-a-quarter percent of consolidated revenue fund expenditures, but the Liberal panel claimed that it should be 4.5% in fiscal 2003-04. That was $1.25 billion, which, again, was not meant to be spent but nonetheless was listed as an expense.

From these two sources — changes to the consolidated revenue fund of $2.52 billion, and a revised forecast allowance of $1.25 billion — the commission was able to create a $3.75 billion-plus deficit to appear three years into the future.

Incredibly, to this figure they added another $1.5 billion representing the revenues lost as a result of the B.C. Liberals cuts in personal income tax rates. In effect, the defeated NDP was blamed for the deficit arising from B.C. Liberal tax cuts!

In total, the deficit which the Liberal fiscal panel “projected” was a massive $5.27 billion. A supportive headline soon appeared in The Vancouver Sun — "B.C. risks $5-billion in 3 years" — which gave credence to the claim that the Campbell government had “inherited” a massive deficit from the NDP. It was a masterful job.

A $5 billion mirage

The Liberals’ response to this supposed “structural” deficit in their July 30 mini-budget was to cut corporate taxes by a further $700 million, and increase expenditures by nearly half a billion dollars. Strange.

A massive deficit soon appeared, not surprisingly. But it was because the Liberals’ tax cuts reduced revenues by more than $2 billion while spending was increased by a similar amount. When recession hit, BC was in a huge hole. None of it had anything to do with the New Democrats.

Even more puzzling, no Liberal budget has ever contained a forecast allowance in the consolidated revenue fund of 4.5% as their own Barefoot commission had prescribed. Indeed, the Liberal forecast allowances have been even lower than NDP cushions, usually $100 million to $300 million.

But all this is known long after the alarm bell headlines ran in the BC papers and served their purpose to discredit the NDP.

And sadly, the contribution of Tim Duholke and his fellow panel members is unknown to most British Columbians. It certainly seems to have been forgotten by the Liberals, who gladly accepted his financial support, but rejected his bid for a seat in the legislature.

Will McMartin writes a regular column for The Tyee and has worked for a wide range of political parties.  [Tyee]

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