What keeps B.C. in the black, as other provinces bleed red

B.C. Finance Minister Mike de Jong on Tuesday will table his third budget. Not entirely by coincidence, it will be the province’s third consecutive balanced budget. Mr. de Jong can rightly claim some bragging rights for this budget season, when most of the country is expected to be awash in red ink.

“Fiscally, we are the envy of virtually every other province,” he says. No false modesty here.

With the possible exception of Saskatchewan, which may yet eke out a surplus despite a hit on its oil-sector revenues, B.C. will be the only province that can coast along with modest growth, buffered from the collapse in oil prices that has kept some other finance ministers awake at night.

Alberta, which has relied on oil for one quarter of its revenues, is now staring down the barrel at deep spending cuts, higher taxes and a deficit after a $7-billion loss in revenue due to the six-month slide in oil prices.

Oil-dependent Newfoundland and Labrador, too, will face a fiscal crunch. Ontario can count on growth in the coming year, but still faces a long road to eliminate its $12.5-billion deficit.

Mr. de Jong takes credit for his province’s good fortune via policies that have supported expanded trade and years of restraint on the spending side.

“That’s a tribute to, I think, a couple of things: the diversification of our economy, the diversification of our markets and our fiscal discipline we’ve shown.”

There is more to B.C.’s financial state than restraint and a broad economic base, however. Plunging oil prices, the lower Canadian dollar, rock-bottom interest rates and the rebounding fortunes of B.C.’s biggest trading partner, the United States, have all contributed to the province’s good fortune.

Mr. de Jong has relished his role as the modern-day “Dr. No,” however, and will enjoy this moment. He is famously thrifty, still driving his aging Miata sports car with 435,000 kilometres on the odometer. As Finance Minister, he has brought that personal philosophy to shape a $45-billion budget. Standing firm against pressure to spend more on low-income earners and the province’s 300,000 public servants and provide relief to families who are paying more for government services has helped put him in an elite club.

“I’m trying to think of a more complicated way to explain saying ‘no,’ but I’m not sure there is,” he said in an interview. “It’s something one is inclined to feel proud of, where every other jurisdiction is fighting mounting deficits, a third balanced budget in B.C. is almost old news.” And if another surplus does not make headlines, “That’s okay, it’s a good place to be.”

The NDP finance critic, Carole James, says the B.C. Liberal government has arrived at this place at the expense of families. “Who paid for the balanced budget? It’s families, it’s people who are squeezed, the middle class, people who are working hard,” she said. “What I hear from people is, ‘When will there be a break for me?’”

Jock Finlayson, chief economist for the B.C. Business Council, is forecasting economic growth for the province of 2.6 per cent in the coming year. He says the B.C. Liberal government’s strong emphasis on managing expenditures is “paying dividends,” although he notes that the previous two budgets contained tax and fee increases worth several hundred million dollars.

Overall, the state of the B.C. economy is based on factors outside the legislature’s control, he added. “The macroeconomic outlook is reasonably good. ... The reasons are largely external to B.C.”

One big reason is the cost of oil: The average household in B.C. is expected to save more than $500 annually if prices remain low. That’s more than $1-billion in consumer savings, much of it likely to be spent on other goods and services.

“Alberta’s loss is B.C.’s gain,” noted Derek Burleton, deputy chief economist for TD Economics. As well, he said, the drop in the value of the loonie will help exports, and lure more tourists. But it helps that British Columbia has already climbed out of deficits, making the most of even modest growth. “Part of it is B.C. is coming from a good starting point.”

Here are five things that will shape the B.C. budget:

The federal Conservative government has delayed introducing the 2015 budget as it sorts out the impact of collapsing oil prices and the slowing Canadian economy.

In the interim, the B.C. Liberal Finance Minister has taken it upon himself to dispense advice on how to behalf like a fiscal conservative to his federal cousins. “I think we’re better off as a country when governments, including the federal government, aren’t spending more than we take in,” he offers.

Mr. de Jong, despite the Liberal label on his party, has demonstrated a fiscal record that gives him licence to offer the Conservatives tips – welcome or not.

He is projecting a third surplus budget on Feb. 17, and more of the same in the coming years.

“How did we get here? Part of it is the discipline not to commit to year-over-year programming expenditures that are not sustainable,” he said in an interview.

That has meant welfare rates frozen in time, and below-average per capita spending on health care and education. It is also revealed in public-sector contract settlements.

The province has imposed wage freezes, and more recently offered wage increases in exchange for other savings. For the province’s 300,000 public sector workers, it has been tough medicine. Mr. de Jong maintains his government had no choice. “It’s the cumulative effect, year over year. If you commit to those expenditure increases, that’s when you find yourself in difficulty.”

The B.C. government has not had much help from its neighbours, particularly Alberta, where comparable public sector wages have climbed faster. A registered nurse in Calgary makes an average of $4 per hour more than an RN in Vancouver.

“It created pressure for us and now the flip side of that coin is the government of Alberta is going to have to deal with that,” Mr. de Jong said.

Earlier this week, Alberta Finance Minister Robin Campbell said public sector wages in his province are unsustainable. Mr. de Jong remarked, with little sympathy, “it has prompted discussions you never thought you’d hear coming out of Alberta.”

Not so very long ago, B.C. Premier Christy Clark was all about pursuing the “generational opportunity” of a liquefied natural gas industry. The Feb. 10 Throne Speech had a new tone. Barely a mention of LNG, but much praise for the diversified economic base that has steadied the province’s economy.

Alberta, where so much of the economy is tied to selling a single commodity, oil, to a single customer, the United States, was held up as the poster child for poor planning.

“We are fortunate that we do not rely on one commodity,” noted the Throne Speech. “Who could have credibly predicted that oil would lose half of its value in a matter of months?”

The good fortune of a more diverse economic foundation was not produced overnight – NDP premier Glen Clark led a trade mission to China in 1998 – but the payoff is now evident in the province’s balance sheet.

Today, less than half of B.C.’s exports are destined for the United States. And although lumber is still king, the range of commodities has broadened. B.C. is exporting energy and agriculture products and increasingly, machinery and equipment. The province once known for sending wood and fish primarily to the United States is making inroads around the world, selling aircraft, desalination equipment, powdered soups, craft beer and fresh produce.

In short, B.C. is selling a greater variety of goods to a wider number of countries. That is proving to be good insulation in turbulent times. As Asian economies falter, the U.S. economy is picking up steam.

Since the last formal budget update in November, B.C.’s finance officials have watched one revenue stream grow beyond expectations: Taxes from retail sales.

British Columbians already have the second-highest household debt in the country, but fuelled by rock-bottom borrowing costs, they are on a spending spree and that is helping boost the government’s bottom line.

It is a bright spot that Mr. de Jong worries about.

“Retail sales are well above where we thought they would be a year ago,” he told reporters recently. “That’s good; that provides some positive returns to the government. Obviously to retailers it is also an indication that consumers are feeling more positive, better about their own economic prospects, but it can’t come at the expense of people becoming overly leveraged and that’s where in the past I have expressed some concern.”

Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada, agrees that Canada’s low interest rates induce spending on big and small-ticket items that can later bite back.

“It does have a psychological effect, when people see they only have to pay that monthly minimum payment, they think they are doing fine,” Mr. Schwartz said an in interview. “They don’t realize if they continue down that road, they’ll be paying two or three times the price.”

In B.C., the average household debt climbed by a whopping $21,000, he noted. And a Canadian Payroll Association survey last fall shows 47 per cent of British Columbians are living paycheque to paycheque, leaving them at risk financially.

Mr. de Jong said he will be cautious in counting on retail sales to continue at the current pace.

From a vantage point in Calgary or Ottawa, plunging oil prices are a source of consternation. In B.C. there is a downside, too: lower natural gas prices and probably further delays of any liquefied natural gas investments.

But in the short term, low oil prices are good news for the B.C. economy.

“We do produce a small amount of oil in B.C., but the volumes are insignificant and there is little direct impact in terms of government revenues or scaled back capital investment. On the other hand, there are numerous channels through which benefits will come,” Ken Peacock, chief economist of the B.C. Business Council, wrote in a recent analysis. “The most significant is for consumers.”

Based on Statistics Canada figures, in recent years the average household in B.C. spent $2,100 to $2,300 on gasoline. That is when fuel prices at the pump averaged $1.40 or more per litre. If gas prices average $1.04 for 2015, those households could save $550 annually on fuel – translating to economy-wide savings for B.C. consumers of more than $1-billion.

“Some of this may be saved, but most of it will be spent on other goods and services, boosting activity in the retail, hospitality and other consumer service sectors,” Mr. Peacock said in his analysis.

So that is good news for this coming year, but in the long run, the balance may shift.

The price of oil is linked to the price of natural gas, and that means B.C.’s natural gas sector is in trouble. It is a vital part of the economy, but the province’s revenues from this sector will be down significantly in the next budget. “Unless we find an outlet for that resource off shore, we will see a steadily declining demand for British Columbia natural gas in the North American context,” warns Mr. de Jong.

British Columbia was bullish on Asia not so very long ago – Ms. Clark’s trade missions have taken her to China, Malaysia, South Korea, Japan and India. Her trade office touted the momentum of those efforts in boosting sales of traditional commodities such as wood, as well as breakthroughs like Okanagan cherries to China.

But the shining star of exports this year will be our old friends south of the border, and the lower Canadian dollar is playing no small role.

Trade with the United States has been climbing since 2012, while exports to China and Japan have slowed. The weaker Canadian dollar has made B.C.’s goods more attractive in the United States.

In 2014, while the loonie lost almost 10 per cent of its value against the U.S. dollar, B.C.’s merchandise exports climbed by 17 per cent, notes the B.C. Business Council’s latest economic review.

“Looking ahead, B.C. will be relying heavily on the U.S. to further boost exports over the next two years,” the report said. As well, the council predicts strong gains in tourism, again mostly thanks to U.S. travellers attracted by the weak Canadian dollar.

There is one other advantage for B.C. “You can plot it on a graph, when the U.S. dollar is weak, cross-border shopping is up,” says Mark Startup of the Retail Merchants’ Association of B.C.

And right now, his members are seeing improved sales in recent months, while border crossings are down.

“I can’t says it is entirely because of the dollar, but it is contributing without question.”