B.C. balances budget, bets on LNG windfall

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The B.C. government is banking on a hoped-for windfall from a liquefied natural gas industry that may not start producing revenue for another five years to start tackling the fiscal hangover left by four successive deficit budgets.

Until then, Finance Minister Mike de Jong is projecting modest surpluses that leave no wriggle room for tax cuts or new spending, and small revenue cushions that leave little margin for error.

With his fiscal plan showing a tiny surplus on the $47-billion spending plan, Mr. de Jong had little room for good news in Tuesday's budget. He directed attention instead to the future, using the spotlight to reveal a tax framework for a liquefied natural gas industry.

The promise of an LNG industry in B.C. "is very real," Mr. de Jong told the legislature. But when pressed about when British Columbians can expect to see any benefits, he adopted a cautious tone.

Before the last election, the B.C. Liberals campaigned on a plan to retire the provincial debt with a "prosperity fund" that would begin collecting revenue from LNG by 2017. The campaign platform stated that the fund would reap up to $100-billion over 30 years.

In Tuesday's budget briefing, Mr. de Jong hedged his bets, saying the timing of the fund will be determined by final investment decisions, which have not yet materialized.

"I don't want to suggest a cascade of money flowing in the prosperity fund the next five years," Mr. de Jong told reporters. "That's not likely to occur."

Mr. de Jong's balanced budget offered little in the way of short-term benefits. There is a projected surplus of $184-million in the coming year – a feat made possible partly due to increases in medical service premiums, tobacco taxes and B.C. Hydro rates. The province is expecting to see "steady" but modest economic growth of 2 per cent, while spending is set to rise by 1.7 per cent.

"That allows us to be part of a pretty exclusive club in Canada, the balanced budget club," Mr. de Jong said.

But he acknowledged that the province's labour market performed poorly last year compared to other provinces, and the employment picture isn't really expected to improve until 2015.

The opposition New Democrats pounced on rising fees and the government's poor job-creation record. "This budget shows Christy Clark and the B.C. Liberals aren't fighting to make life more affordable for British Columbia's families. In fact, it does the opposite," said NDP finance critic Mike Farnworth.

The only reference to LNG on the financial pages of the budget is on the spending side – the province has set aside $29-million over the next three years to help secure LNG investments.

The benefits will not begin to flow back to Victoria until the first plant begins to export. Government officials say the earliest likely production date would be 2018 – and even that date is nowhere to be found in the budget documents.

The B.C. Liberal government campaigned in the last election on the promise of a "debt-free B.C." that would use LNG revenues to pay off the province's debt. But Mr. de Jong refused to say when the province's swelling debt might start to shrink. By the third year of the fiscal plan, the provincial debt is set to climb by $7-billion, because of borrowing for capital programs.

The LNG tax framework proposes that for the first three years in production, a new industry-specific income tax rate will be set at 1.5 per cent, to allow companies to recoup some of their steep capital investment costs. After that, the rate would begin to climb to a second tier which has been pencilled in at up to 7 per cent.

Geoff Morrison, a spokesman for the Canadian Association of Petroleum Producers, said the framework looks workable but LNG proponents will have to crunch the numbers to decide whether building in B.C. is economically feasible. "This brings us one step closer to some clarity. That's encouraging, but it's more complicated than just the tax." The industry is still waiting to see other key policy decisions, including environmental regulation.

The LNG tax legislation will not be introduced until the fall, and the government is still consulting with proponents on the details.

For the coming fiscal year, the surplus is small enough to be precarious, for a province so reliant on commodity prices and exports. "We continue to balance on a razor's edge," Mr. de Jong said.

The forecast allowance is set at $200-million, and there is a contingency fund of $300-million. The contingencies are meant to cover any increases in public-sector labour settlements, unfavourable litigation, higher than expected social-service demands, and natural disasters such as forest fires.

The entire contingency fund could be wiped out if the government loses its appeal of a Supreme Court ruling regarding public-school teachers.

Jock Finlayson, chief economist for the Business Council of B.C., said the revenue cushion – the contingency plus the forecast allowance – is too small but otherwise the government has provided "an abundance of caution" in its economic outlook.

In his speech, Mr. de Jong said his government intends to step up skills training initiatives to help groom a work force that will be able to build the pipelines, mines and LNG facilities that it hopes to see online in the coming years.

But Jim Sinclair, president of the B.C. Federation of Labour, said there is no genuine commitment to skills training. "We are pinning much of our economic future on an LNG project and they require skills training to start today. This is a critical area and they have basically frozen the budgets for the next three years and they cut employment training. We are not going in the right direction."

The budget promises to "do a little bit more" for the province's most vulnerable citizens, including children and youth with special needs and those in need of legal aid. However it offers little tax relief for families, a decision Mr. de Jong defended. "We'd like to do more. Admittedly, the tax relief in this budget is pretty thin," he said but added: "One of the reasons we are in the black is that we haven't over-reached."