Today, BC Finance Minister Mike de Jong presented the second consecutive balanced budget of Premier Christy Clark’s government. In recognition that the budget contains few surprises or new measures, Minister de Jong labeled the budget a “Triple B” budget, meaning it is a Boring Balanced Budget. He said that this budget, and the two forecasts to follow it, are balanced “on a razor’s edge” with thin margins for forecast error. Spending restraint will remain as a government priority for several years to come.
The 2014 budget follows the government’s themes of disciplined spending, controlling the size of government, and promoting job creation primarily through developing an LNG sector. For the first time, the BC Government has unveiled its proposed fiscal regime for an LNG sector with suggestions for tiered LNG Income Tax rates. Budget documents stress that the tax rates are subject to confirmation in legislation to be introduced later this year. As such, it is possible that the final tax rates suggested in the budget may change after consultation with industry.
Revenues, Expenses, and Debt
The Economic Forecast Council, an external advisory body to government, expects 2.3 per cent growth in 2014-15, 2.7 per cent growth in 2015-16, and 2.7 per cent growth in 2016-17. Building in an additional layer of prudence, the BC Government is forecasting 2.0 per cent growth in 2014-15, 2.3 per cent growth in 2015-16, and 2.5 per cent growth in 2016-17.
Contingencies are forecast to nearly double over the three-year plan, in large part because of the province’s 2014 Economic Stability bargaining mandate. This mandate means that if the economy outperforms expectations, public sector employees will get higher raises. Minister de Jong credited public sector staff for taking very lean salary increases over the past four years and said it is a key reason why he is able to present balanced budgets.
The taxpayer supported debt ratio, a key indicator used by debt rating agencies, is expected to decline over the next three years after rising since the start of the economic downturn in 2009. It is forecast at 18.4 per cent in 2014-15, 18.2 per cent in 2015-16, and 17.8 per cent in 2016-17. While the budget is balanced and the taxpayer supported debt ratio is dropping, overall government debt is nonetheless forecast to grow in response to capital infrastructure needs to $64.7 billion in 2014-15, $66.9 billion in 2015-16, and $68.9 billion in 2016-17.
For the first time in years, the government is giving more money back to British Columbians than it takes away. Minister de Jong admitted that measures to help taxpayers were “slim” but included the 2015 introduction of the BC Early Childhood Tax Benefit announced last year, extending tax credits for research and development for another three years to 2017, and a $50,000 increase to the threshold for exemption from property transfer tax for first-time homebuyers. Smokers are targeted with a 32¢ per pack increase, expected to raise $50 million annually. This single tax increase stands in stark contrast to the 2013 tax changes that generated over $400 million annually in new revenue. Revenue is expected to average 2.6 per cent annual growth over the three-year fiscal plan.
On the expenditure side, Minister de Jong plans to increase the rate of overall government spending to 2.2 per cent over the next three years, up from last year’s forecast of 1.5 per cent. Expenditure increases are intended to reinvest in priority areas, such as $243 million over three years to help adults with developmental disabilities and their families, $15 million over three years for youth with special needs, and $21 million over three years for policing costs and legal aid.
Also of note is that the provincial government is changing the way government manages cash within its organizations. The Auditor General has noted that the government has more cash on hand than it requires. As such, Minister de Jong has said he plans to encourage excess cash held by government organizations to be deposited with Provincial Treasury until it is needed. He expects there is nearly $1.6 billion excess cash which can be used more effectively for debt management, resulting in $18 million in savings in 2014-15.
Energy + Natural Resources
As expected, the province announced more details on the planned LNG tax regime. The government is proposing a two-tiered tax, with a rate of 1.5 per cent applied after production and a rate up to 7.0 per cent once capital investment costs have been deducted. These rates will be confirmed and finalized in legislation to be introduced this fall.
The government also announced additional funding of $29 million to the ministries of aboriginal relations, environment, forests, and natural gas development to support the development of BC’s LNG industry. There is a possibility that the province would dip into contingency funds to accelerate LNG development if this additional funding is deemed insufficient.
Natural gas royalties are expected to increase at 16.4 per cent over the next three years due to higher prices and production volumes, although prices will remain lower than previous highs.
Revenue from the sale of Crown Land tenures is expected to decline 10.3 per cent over the next three years, while revenue from metals and minerals is expected to grow 11.8 per cent, mainly due to rising coal prices.
Forests revenue is expected to increase $111 million (16.5 per cent) in 2014-15 due to increased stumpage revenue.
Budget 2014 also includes $9 million over three years to support the environmental assessments of resource development impacts of proposed LNG facilities, pipelines, mines, and other major projects.
Health and Education
The Ministry of Health’s overall budget will see $2.5 billion in additional spending for the next three years. This results in a 2.6 per cent annual increase, slightly more than the 2.5 per cent forecast last year. Minister de Jong said the government has managed to put the ministry on more sustainable footing while maintaining BC’s excellent health outcomes.
This budget designated that the $50M in revenue from the new tobacco tax will be dedicated to cancer prevention strategies.
There is no change in funding for either post-secondary or K-12 education. The Ministry of Advanced Education’s budget reduction of $50 million per year continues and the government reports that internal efficiencies to reach those savings targets are on track.
New capital investments support expanded trades training in Kamloops, Victoria, Kelowna, and for visual, media, and design at Emily Carr University in Vancouver.
Transportation + Infrastructure
A $5 million (over five years) partnership with the Aerospace Association of Canada Pacific Division is intended to grow the province’s aerospace sector and help attract global aerospace and defence contractors to BC.
Similar to last year, government investments in transportation are decelerating. This year’s budget offers $93 million less in provincial transportation investments over the next two years compared to last year’s forecast.
Operational funding tells a better story for transportation development. The overall funding for port and airport development will increase slightly in the coming fiscal year, rising to $7.7 million.
Stakeholder + Opposition Reaction
Business leaders were cautiously positive about the budget, praising debt management and spending control. Some business associations noted there were not many new initiatives that would support economic development outside of the LNG industry.
The oil and gas industry was pleased that the province unveiled a LNG fiscal regime for consultation. Initial comment from the industry was muted noting that BC had many positive factors for LNG development, although some industry representatives were quick to point out that the proposed LNG Income Tax was unfavourable compared to jurisdictions in which none is charged.
NDP Finance Critic Mike Farnworth said that the budget doesn’t fund several commitments the government has recently made. He said that the BC Liberal government and the budget ignores forestry and other key sectors, and that it fails to deliver on promised jobs.
The complete 2014 Budget is available here: www.bcbudget.gov.bc.ca/2014/default.htm