Oh, about the size of that BC deficit for next year…
It’s the leading article in the BC section of national newspapers today: BC’s Finance Minister has finally admitted that next year’s budget deficit would be much larger than the $495 million number than our Premier swore by during the recent election campaign. Private sector economists have been saying it for a while and it was about time for the government to officially acknowledge the realities of their fiscal situation.
In a nutshell, it was simply unrealistic to claim that the rosy budget estimates can be maintained in the face of the severity with which the recession hit BC. Virtually all macroeconomic assumptions used to derive revenue and expenditure estimates in last February’s budget have since been revised downwards, and steeply â€“ the current private sector forecast for nominal GDP is for a 2% decline instead of 0.9% decline, employment is projected to fall by over 2% instead of 0.5%, housing starts are projected to be about half of the Budget forecast, and the list goes on. All of this means that government revenues are bound to be considerably lower than projected while some spending (eg. welfare) would inevitably rise.
The 2009 Budget did not contain much in terms of a forecast allowance or contingencies outside of what Collin Hansen called â€œconservative assumptionsâ€ at the time, so unless the Minister plans to cut spending considerably thereâ€™s no way to keep the deficit to $495 million. And for a government which “remains committed to maintaining health care services, education and the vital social services” (in the words of the Finance Minister quoted here), and which has already budgeted for $1.9 billion of largely unidentified efficiencies over 3 years, there is little room left for cuts.
On the upside, allowing the deficit to grow as needed during the recession is really not so bad. BC is in an excellent fiscal position to do this, with one of the lowest debt to GDP ratios in Canada and low costs of government borrowing. Even business groups are speaking out in support of larger deficits in the media (see Jock Finlayson’s comments here). Once we’ve accepted the need for deficits in order to cushion the recession blow and stimulate the economy, it makes little sense to narrow-mindedly insist on sticking to an arbitrarily chosen number for next year’s budget deficit.