Just a week before sending the budget he will unveil on Tuesday to the printing presses, B.C. Finance Minister Mike de Jong was confronted with a report that showed his revenue assumptions were too optimistic.
That left him scrambling to recalculate the numbers on his precarious surplus budget, trimming roughly $65-million from the expected income from the important natural gas sector.
The B.C. Liberal government hired economist Tim O’Neill to spend a week reviewing the economic assumptions and revenue forecasts to help counter the B.C. Liberals’ eroded fiscal credibility. A week before the budget document was sent to the Queen’s Printer, he warned the government of his concerns. Mr. O’Neill’s final report was released publicly on Monday.
Overall, Mr. O’Neill gave the province’s forecasting abilities a clean bill of health, but he said the volatile energy sector deserves additional caution.
“Natural gas revenues have been over-projected in five of the last eight years and the average size of these negative variances is substantial,” he wrote. Although natural gas does not account for a large portion of the government’s revenue, the miscalculations have accumulated to a $584-million accounting hole.
“That is a key reason for my suggesting that the forecast for natural gas revenues be shaded down further in the upcoming budget.”
Mr. O’Neill, speaking to reporters, stressed that he had only seven days to do his analysis. He has done similar work for the federal government and the government of Ontario but had months to complete his work in those cases.
As a result, he did not assess the spending figures, nor did he look at some revenue streams, such as dividends from Crown corporations.
But he did dig into the natural gas estimates because they have been chronically misstated. And he delivered a gloomy message for a sector that is critical to the government’s plans to launch a liquefied natural gas industry.
If the government used its usual forecasting method, it would be projecting an average price of $2.13 per gigajoule – a 46-per-cent increase over the average price for natural gas in 2012 but still a poor price that reflects the current glut of natural gas in North America.
The economist said B.C. should be more pessimistic.
“The recommendation is that the budget choose a price in the $1.80-$1.90 range for the 2013/14 fiscal year,” Mr. O’Neill wrote. “If, for example, a price of $1.85 were used, the impact on natural gas revenues, relative to the average forecaster price, would be to lower them by about $60-million to $70-million.”
Mr. de Jong told reporters on Monday he had to reduce the estimated surplus by that much as a result.
“No question, given where we are in the electoral cycle, there is a heightened level of interest, and dare I say skepticism, when documents like the budget are presented,” the Finance Minister said. The decision to amend the budget “was not difficult,” given the Liberal government’s desire to present this budget as a key election document.
The pre-election budget is not expected to offer much room for costly new programs, given the challenge of moving from a series of large deficits to a surplus. Last week’s Throne Speech did hint that some good news is coming, likely around improved child-care support and health services.
The business community is anxious about how those cost pressures will be managed. Jock Finlayson, chief economist for the Business Council of B.C., said his members are bracing for higher corporate taxes in some form. “There will be no enthusiasm in my community for tax, royalty or fee increases in addition to the return to the PST, which will hammer the daylights out of us.”