B.C. Business Matters:
Jock Finlayson >>
So far, so good...but proceed with caution: An update on B.C.'s fiscal picture
Last month, B.C. Finance Minister Carole James wrapped up the NDP’s first full financial year and provided an update on the government’s books through the first quarter of 2018-2019. Here’s what you should know.
The Good News
Despite a turbulent year that included B.C.’s worst ever wildfire season and growing global trade tensions, the B.C. economy posted decent growth and the Minister was able to report a larger-than-expected operating surplus. The government estimates that B.C.’s real GDP growth rate will remain among the highest in the country, at 2.2% in 2018 and 1.8% in 2019. We are comfortable with these forecasts – indeed, they are probably on the conservative side. The government now projects an upwardly revised budget surplus of $669 million for this year, nearly tripling the estimate in last February’s budget. All signs point to B.C. retaining the triple-A credit ranking passed down from the previous Liberal administration.
Taxpayer supported provincial debt consists of past operating deficits plus the bulk of all borrowing undertaken by the government to support infrastructure and other capital spending. The key taxpayer-supported debt-to-GDP ratio ended last year at 15.6%, which is below the 16.2% anticipated in the 2017 Budget.
Figure 1: Total Provincial Debt
|Source: Minister James' Budget Update Presentation.|
Provincial government revenues increased over the past year (Table 1), mainly owing to an unexpected windfall from federal government cash transfers and increases in combined taxation revenues. Personal income tax revenue was down 8% from the previous year, while corporate income tax revenue jumped 38.7%.
The table below breaks down each of the provincial government’s principal revenue sources. Taxation – a big category -- is the biggest source of revenue; it includes personal and corporate income tax, sales tax, fuel and carbon tax, and several other sources. It should be noted that tax revenues are closely linked to economic growth.
Table 1: Provincial Revenue by Source
(2013/14 to 2017/18)
|Contributions from federal government||7,514||7,279||7,647||8,167||9,055||21%|
|Fees & licenses||5,210||5,425||5,836||6,213||6,249||20%|
|Net earnings of self-supported Crown corporations||2,701||3,371||2,710||2,525||1,056||-61%|
|Source: Office of the Comptroller General, Public Accounts, 2017/2018, pg. 13.|
A cautionary note about revenues: The lift to provincial revenue streams this year was offset by sizable losses on the net earnings of Crown Corporations, notably B.C. Hydro and ICBC.
In addition, Property Transfer Tax (PTT) revenues trended down over the first two quarters of 2018, signaling that real estate sales may no longer be the money-maker for the province that they once were. The amount collected from PTT is now expected to be down $250 million for the current year, $300 million lower in 2019-2020, and $400 million lower in 2020-2021. While the NDP administration has framed this as a “shift away from a false economy based on a speculative real estate market,” the decline in PTT revenue also indicates that the NDP’s drive to cool the housing market is working – perhaps “better” than policy-makers expected, albeit at some cost to the public purse. Should this source of revenue continue to shrink, the government will need to find new revenue streams to offset the decline.
To ensure balanced books in future years, spending growth must be matched by revenue gains. So far, that looks to be happening, but there are reasons for concern when pondering the province’s financial situation a few years out. With many promises to hike spending and the loss of revenues due to the elimination of bridge tolls and MSP premiums, the government will be on the lookout for added revenues. It has already taken steps in this direction through higher personal and corporate income taxes and a $5/ton increase in the carbon tax (with additional $5/ton increases to follow in 2019, 2020 and 2021). The new Employer Health Tax will also be a powerful money-spinner for the province once it’s up and running next year.
Going forward, we see some risks to the province’s fiscal picture over the medium-term:
- ICBC’s financial position may not be “back in the black” within the next three years, despite rate increases and other policy changes.
- Softwood lumber disputes and other trade issues with the U.S. and around the globe could negatively impact certain revenue streams.
- Interest rates will continue to rise over the next 2-3 years, costing the province hundreds of millions of dollars in additional interest costs.
- Investors may be discouraged by continued Trans Mountain Pipeline delays and the general decline in Canada’s attractiveness for new business investment across most natural resource, manufacturing and infrastructure industries.
- The robust, housing-centric economic upswing that B.C. experienced over the past few years is unlikely to return.
- Future collective agreements across the broad provincial public sector will lock in higher labour costs and could put some stress on the government’s fiscal position -- depending in part on the generosity of forthcoming settlements with unionized employees. More than half of all B.C. government program spending ultimately goes to pay public sector employees (in the government itself, as well as in the education, health care and social services sectors).
- Finally, it has been nearly a decade since the last global downturn; both the US and Canada will be due for a significant economic slowdown by 2020 or soon thereafter.
So, the takeaway on the current provincial fiscal outlook? So far, so good, for now. But proceed with caution.
 The debt of self-supporting Crown Corporations is not included as part of the taxpayer-supported debt. B.C. Hydro accounts for the bulk of this debt.