April 20, 2021 | 19:39
The Province of British Columbia is projecting a $9.7 billion deficit in FY21/22, which weighs in at 3.1% of GDP or about middle-of-the-road among the provinces. The good news is that FY20/21 is tracking meaningfully better than last expected, with the deficit last fiscal year now estimated at $8.1 billion, down from $13.6 billion expected in the fall fiscal update. As we suspected, revenues have come in much stronger than the province thought (they tend to run with conservative forecasts anyway). Additionally, this budget continues to build in prudence on three fronts: A conservative economic outlook; a $1 billion forecast allowance; and $3.25 billion in pandemic and recovery contingencies that are roughly allocated, but might not necessarily all get used.
That said, this year's wider deficit and still-heavy capital spending program will lift net debt to $72 billion, or just under 23% of GDP (up 4.1 ppts). While that is still at lower end of the pack (near Alberta and Saskatchewan), the percentage increase in net debt over the past two years is second only to Alberta. There is no plan to balance the books, but the deficit should fall to $5.5 billion next fiscal year and $4.3 billion by FY23/24, or a manageable 1.3% of GDP. Net debt, however, will continue to climb to 27.3% of GDP by FY23/24, with no sign of turning lower, driven by capital-plan borrowing.
This budget doesn't break much significant new ground in terms of policy measures, but does extend some current programs and adds more dollars to support the pandemic and early stage of the recovery.
Summary of Major Policy Measures
-Investments in health care, including critical health infrastructure, training and hiring more health care workers and expanding mental health services.
-Support for children and youth including hiring child care providers, youth skills training, and free public transit for children 12 and under.
-Support for businesses through the recovery, including a new StrongerBC Increased Employment Incentive tax credit and support for hard-hit sectors.
-Capital plan includes a $2.2 billion jump in taxpayer-supported spending, to $8.5 billion. Health, transportation and education infrastructure get significant boosts.
-Gross borrowing will peak at $19.2 billion for FY21/22 before declining steadily over the next two years.
Total revenue is expected to decline 3.3% in FY21/22, to $58.9 billion. The decline results from a drop-off in federal transfers as pandemic-related funding rolls off, but also lower tax revenues. Specifically, corporate income tax revenues are expected to fall 29%, mainly the result of a lower tax base and prior-year settlements. We certainly won't argue with the province's own visibility on this front, but the revenue line looks conservative alongside better than 6% nominal GDP growth. At this point, B.C. is the only province expecting a total revenue decline in FY21/22.
Furthermore, we judge that the revenue outlook is based on conservative economic assumptions. Real GDP is projected to have contracted 5.3% in 2020 before rebounding by 4.4% in 2021. That forecast is more pessimistic than our call for a 4.8% contraction in 2020 and a 6.8% recovery this year. Since the first wave, the province has had a relatively limited health impact from the pandemic, with more limited and stable restrictions. The housing market remains a key driver of growth, as is the case in the rest of the country. However, pockets of weakness persist, especially in sectors like tourism and recreation. And, the current wave of infections poses more economic risk than we saw in the latter half of last year, with new restrictions announced on budget day. Still, we continue to believe the province will outperform the country this year.
Total expenses are projected to rise 4.5% in FY21/22 to $64.4 billion. With all pandemic and recovery spending contingencies lumped in, total outlays would dip just over 2%. Total capital spending will rise strongly to $13.5 billion, led by a hefty increase in taxpayer-supported spending—up $2.2 billion, to $8.5 billion. Health, transportation and education infrastructure remain key priority areas.
Gross provincial borrowing is estimated at $19.2 billion for FY21/22, up from $17.9 billion in FY21/22—the latter came in about $9.4 billion larger than expected, largely due to the operating surplus turning into a deficit. Borrowing then declines in each of the following two years, to $17.7 billion in FY22/23 and $14.9 billion in FY23/24, consistent with the capital plan profile.
The Bottom Line: The good news is that a resilient economy has cushioned last year's deficit quite a bit more than B.C. expected. The less-good news is that this year's deficit is expected to widen slightly, but is again padded with ample contingencies. And, the tougher news is that B.C. continues to let its debt-to-GDP ratio run higher—the Province seems comfortable borrowing for capital purposes at record-low interest rates and with a favourable starting point versus its peers.