A prudent budget in times of uncertainty

Strong points:

  • British Columbia government projects $5.5 billion deficit, $5 billion more than fiscal year 2021-22
  • Spending will increase by $4.6 billion (+6.9%) this year as spending on health and education increases
  • Revenue will fall by $1.7 billion (-2.4%) as one-time federal transfers shrink and the commodity boom dissipates
  • The debt-to-GDP ratio is now expected to reach 23% by FY 2024-25, well below the previous cap of 30%


Summary

Finance Minister Selina Robinson presented her second pandemic budget on February 22. Against the backdrop of robust economic activity and an easing of restrictions, the tone of this year’s budget, while still resolute, was more optimistic. Budget 2022 includes a deficit of $5.5 billion in fiscal year 2022-23, matching the record pandemic deficit reported in fiscal year 2020-21, although more than 10 times larger than the deficit of $483 million currently planned for fiscal year 2021-22. The increase in the deficit next year largely reflects the expiry of one-time federal supports and an expected fall in commodity prices, which will translate into lower revenues (down $1.7 billion). At the same time, spending will increase by $4.6 billion with funding largely targeted to health, education and child care. Over the budget horizon, the deficit is expected to narrow to $3.2 billion by fiscal year 2024-25. Directions on the path to balance were not included in this budget. British Columbia’s level of debt to GDP is expected to reach 17.8% at the end of this fiscal year, rising to 22.8% by the end of the fiscal plan. This is the lowest debt profile among the provinces.

Spending – Building a Stronger Economy

Budget 2022 includes total operating expenditures of $71 billion for the 2022-23 fiscal year, up 6.9% ($4.6 billion) from the previous year. Additionally, the government is maintaining pandemic and recovery contingencies over the next two years, although they will be reduced from $1.3 billion to $2 billion in fiscal year 2022-23, then to $1 billion in fiscal year 2023-24.

Health spending accounts for the largest share (about 40%) of British Columbia’s operating expenditures, with nearly half of the province’s spending growth attributed to health spending. Costs associated with regional health services and the provincial Medical Services Plan will increase at an average annual rate of 5% over the fiscal horizon (to fiscal year 2024-25). At the same time, base budget health spending will increase to $27 billion to meet population growth. In pandemic contingencies in British Columbia, $875 million is being allocated for provincial immunization programs, personal protective equipment and COVID testing.

Budget 2022 expands ChildCareBC’s original plan and the province’s agreement with the Government of Canada to provide affordable and accessible child care, allocating $3.2 billion to the program over 5 years. By the end of 2022, the province aims to reduce average child care costs for infants and toddlers by 50% (to an average of $20/day).

Additionally, Budget 2022 includes new measures to address and adapt to climate change. Along with a $1.3 billion investment over three years through the CleanBC program (increasing the previously allocated $2.3 billion), British Columbia announced it would waive PST on electric vehicles and electric heat pumps in the future. The clean building tax rebate will support renovations of large rental and commercial buildings. In response to climate risk, British Columbia has (cautiously) earmarked $2.1 billion in Budget 2022 to prepare for and recover from wildfires and flooding.

Revenues – Out of Commodity Boom

In the coming fiscal year, British Columbia is forecasting revenue of $68.6 billion, down 2.4% from fiscal year 2021/22 (a decrease of $1.7 billion). Most of this decline is attributed to lower expected natural resource revenues. In addition, one-time federal transfers disappear from the province’s balance sheet in fiscal year 2022-23.

An expected decline in personal income tax revenue will be offset by an increase in corporate income tax and sales tax revenue next year. Carbon tax revenue is expected to grow at an average rate of 5.2% per year over the forecast horizon, with the tax rate increasing from $45/tonne in fiscal year 2021-22 to 50 $/tonne in fiscal year 2022-23. Overall, provincial tax revenues are expected to stagnate in fiscal year 2022-23. The absence of pandemic-related federal support payments will cause federal transfers to fall by 2% next year. But, as British Columbia’s share of the national population increases, transfers to the province will also increase over the medium term.

Natural gas royalties are expected to increase by just under 22% in fiscal year 2022-23 as production volumes increase and use of the province’s royalty credit program declines. But the bulk of B.C.’s natural resource revenue comes from the forestry sector, whose projected $726 million drop in revenue accounts for the majority of B.C.’s declining revenue. Lower cutting rates and production volumes are to blame, after unusually strong pandemic-related activity in the sector.

Capital expenditure: still at record levels!

British Columbia’s level of capital spending will reach $13.6 billion in fiscal year 2022-23, bringing total capital investment over a three-year horizon to $39.4 billion , with taxpayer-supported investment increasing by 30% in the next fiscal year. Most of the allocation is for BC Hydro, the BC Transportation Financing Authority, and health infrastructure to expand and upgrade existing facilities.

Debt to GDP – British Columbia has the lowest national debt burden

British Columbia’s debt-to-GDP ratios are expected to increase to 20% in fiscal year 2022-23 (up 2.2 percentage points from fiscal year 2021-22) to fund spending operating and capital expenditures. By the end of the forecast horizon (FY 2024-2025), the province’s net debt-to-GDP ratio is expected to approach 23%. At this rate, British Columbia will likely still have the lowest level of debt among the provinces. Borrowing requirements will reach $49.4 billion over the next three fiscal years, an improvement over the 2021 budget. A revision to the fiscal balance from the previous fiscal year has significantly reduced Colombia’s debt burden. British. Debt service charges, at $2.9 billion, represent 4% of total operating expenses. At the end of the budget horizon, this share will approach 5% as interest rates rise.

British Columbia entered the pandemic on solid footing and benefited from soaring commodity prices during the recovery. Over the forecast horizon, British Columbia will stay the course and reduce its record deficit, keeping the debt-to-GDP ratio within a manageable range. BC included numerous prudential measures in the 2022 budget, including planned provisions of $1 billion, recovery contingencies, program spending. BC entered the pandemic on solid footing and benefited from soaring commodity prices during the recovery. Over the forecast horizon, British Columbia will stay the course and reduce its record deficit, keeping the debt-to-GDP ratio within a manageable range. British Columbia included numerous prudential measures in the 2022 budget, including planned provisions of $1 billion, recovery contingencies, program spending contingencies, and assuming a GDP level of 0, 2 percentage points lower than the private sector average. In fiscal year 2021-22, a high degree of caution meant the province’s deficit was much lower than expected. Given this repeated great caution, there is a good chance that the trend will continue this year!


Carrie Freestone is an economist at RBC. She holds a Bachelor of Arts (Honours) in Economics from Queen’s University and a Master of Arts in Economics from the University of Ottawa.

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