Deficit Still to be Eliminated in 2013-14

• Before the $1.6 billion Harmonized sales tax (HST) transition repayment, revenues for 2011-12 are $467 million lower than budgeted, and expenses are $100 million larger. The deficit is therefore $567 million higher at close to $1.5 billion ($3.1 billion including the HST transition repayment).

• The forecast deficit in 2011-12 includes major buffers, that is, a $600 million contingency and a $350 million forecast allowance.

• Real economic growth is assumed at 2.0% in 2011, the same as in the 2011 Budget. Nominal GDP growth is marginally higher (4.2% instead of 4.1%).

• Natural gas is assumed at C$2.64 per gigajoule in 2011-12, against $3.02 in the Budget, with production off 4%.

• The USD/CAD exchange rate is assumed to remain close to par.

• Taxpayer-supported debt at the end of the current fiscal year is now projected to be $295 million less than budgeted, reflecting working capital improvements and reductions in capital financing requirements.

• With Statistics Canada’s upward revision of 2010 nominal GDP, the ratio of taxpayer-supported debt to GDP is now projected to be at 17.2% (17.5% in 2011 Budget).

Commentary

In the current fiscal year, the government faces a $467 million decrease in revenues from the Budget forecast. This comes mainly from lower corporate income tax revenues, lower commodity prices and reduced net income projections from commercial Crown corporations (mainly the Insurance Corporation of British Columbia). Total expenses are up only $100 million relative to Budget projections, despite a $145 million increase to face higher demand for healthcare services and $47 million for flood-related costs. These increases were partly offset by lower debt-servicing costs mainly due to lower debt balances and reductions in operating expenses.

In the First Quarter Update, reverting to the PST was estimated to produce a loss of more than $700 million from lower tax revenue and increased spending over the three years ending 2013-14. Real GDP for 2012 was revised down from 2.8% to 2.3%. The deficit for next fiscal year was revised to $805 million from $440 million in 2011 Budget. Government must reduce the deficit by $458 million in 2013-14 to balance the budget as required by law.

Despite prudence in the current projections, as is the case for most provinces and the Federal government, downside risks to BC’s economic outlook (U.S. returning to recession, European sovereign debt) cannot be ignored. B.C. Finance Minister Kevin Falcon said that the Province will need to exercise continued fiscal discipline in order to balance the budget by 2013-14. Ministries and agencies will work to manage continuing spending pressures within existing budgets, with additional funding from contingencies if necessary.

BRITISH COLUMBIA – SECOND QUARTER UPDATE 2011