Falcon to cut B.C. spending amid economic turmoil

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With his four-month-old budget plan already unravelling, B.C. Finance Minister Kevin Falcon is planning to slash government spending to absorb the twin setbacks of global economic turbulence and the reversal of the province's harmonized sales tax.

"We're going to be very tough on operating expenditures and people need to understand it is going to be a government that is going to be run very, very tightly from a fiscal point of view," Mr. Falcon told reporters after releasing his first update for the fiscal year.

He said that is the direction voters have given his government in the provincewide referendum that determined B.C. must return to its former system of a provincial sales tax plus the federal goods and services tax

Mr. Falcon did not rule out tax increases but suggested it's not his first choice. "I don't want to take that off the table," he said, but added: "Part of the message that came through on the HST referendum is the public does feel like they haven't got a lot of room to give more to government."

The budget Mr. Falcon inherited when he took over the finance portfolio in the spring is already a lean one, with a 2-per-cent cap on spending growth. Finance bureaucrats warned the government early in February that the budget plan, which Mr. Falcon re-tabled in May, would be "challenging," noting that health and education spending – the two largest costs to the provincial government – have been increasing at a much faster rate.

Figures released Thursday show that in the first quarter of the fiscal year, the ambitious restraints in the B.C. budget Mr. Falcon tabled in May are slipping off track.

Leaving aside the cost attributed to eliminating the HST, the budget is now expected to be $220-million deeper in the red this year. Over three years, revenues are now expected to be off by more than half a billion dollars.

In addition, Mr. Falcon pegged the cost of returning to the former tax system at $2.3-billion over three years – although his figure did not include the tax relief his government promised if voters decided to stay with the HST.

Not only are those proposed tax cuts now off the table, but the government will also claw back $456-million worth of tax relief that it brought in when it imposed the HST. It means British Columbians can expect to pay more in personal income taxes once the PST is restored, and low-income earners will lose their quarterly HST credits.

Mr. Falcon said he remains committed to returning the province back to a balanced budget in 2013, but that is going to be a tougher challenge now, according to the current forecasts. This year's deficit is almost three times higher than in the budget Mr. Falcon tabled in the spring, in large part because of the $1.6-billion B.C. must repay Ottawa now that voters have chosen to repeal the HST.

"He's posturing," said Bruce Ralston, New Democratic Party finance critic. "He wants to re-argue the HST when there are other problems here in British Columbia that people are looking for leadership on."

The BC NDP campaigned against the HST and Mr. Ralston said the price of unbundling the taxes is "manageable."

Mr. Falcon agreed, saying the tax change is the least of his worries right now, given the declining financial outlook in the United States and in Europe.

"Going back to the PST is not the end of the world. It's tough but manageable," he told reporters. "I'm more concerned about the volatility that is beyond my control as a finance minister." B.C.'s exports are one of the bright spots right now but commodity prices are in jeopardy.

Mr. Falcon will meet later this month with his federal counterpart Jim Flaherty to begin negotiations on how B.C. will disengage from the HST and repay the transition money, but the province, on the advice of the Auditor-General, is booking the entire sum in this fiscal year.

Economist Jock Finlayson, of the Business Council of British Columbia, said the business community faces $2-billion tax increases when the old system is restored, so there is "no appetite" for higher corporate taxes. He suggested the province could look at selling off property and resources, including Crown lands, buildings and corporations. "There is some scope to look at asset disposals," he said.