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Volume Ten, Number One   January 2005

BC's surplus of irony

Marc Lee

The Ministry of Finance’s second quarter update on the 2004/05 BC Budget deserves to be put in a museum as a wonderful example of the fine art of government spin. In case you have not seen the commercials on TV, the Ministry’s press release begins with four glowing paragraphs about the BC economy. According to Finance Minister Gary Collins, “BC is on the move.”

The big move in the budget update, however, is in the sizable equalization payments coming to BC this year and next. While the government is implying that its big surplus equals a booming economy, it is a little embarrassing that equalization payments are playing such a prominent role.

Page 6 cartoonIt was just a couple of months ago that Minister Collins stated: “We are no longer a have-not province.” Yet, the second quarter update notes that in 2004/05 BC will get a record $721 million in equalization payments, plus $596 million next year.

These hefty cheques from Ottawa are in part due to a new federal-provincial equalization deal hammered out in October that sweetened the equalization pot with more cash. But the painful fact remains: BC is still a “have-not” province.

On top of this year’s equalization take, revised estimates for 2001/02 to 2003/04 also work in BC’s favour, and will provide an extra $259 million in “back equalization” payments. This is one-time money that will be booked in this year’s budget.

That BC is getting more equalization money than previously anticipated this year, next year, and for the past three years, is not exactly an endorsement of the government’s rose-coloured spin on the provincial economy. If the economy was as good as the province has been advertising, BC’s equalization payments should be going down not up.

What does this mean for the budget? Back in February, the government tabled a “balanced budget” for 2004/05 (actually a $200 million surplus if you count the forecast allowance). It was a seemingly tight fit, with $350 million in spending cuts brought in to balance revenues.

Flash forward to September’s first quarter report: BC’s surplus was estimated at $1.2 billion, well up from budget time because of surging resource royalties and property transfer taxes. Interestingly, personal income and sales taxes — the tax bases most connected to economic performance — have barely budged from budget time despite claims of a red-hot economy.

As of November’s second quarter report, the BC government appears to be sitting on a surplus of eye-popping proportions — $2.2 billion dollars worth if we roll in the forecast allowance.

In fact, the surplus is even bigger. The update does not count new money flowing out of September’s federal-provincial health care accord. According to the federal Ministry of Finance, BC will be getting an additional $279 million in 2004/05. So, up that surplus estimate to $2.5 billion.

Next year, it gets even better. New federal money for health care will boost BC’s bottom line by $411 million in 2005/06. And new federal money for early childhood education and childcare could add as much as $130 million.

To put the surplus into perspective, consider that ministries outside health care and education experienced a budget cut that puts them $1.9 billion below 2001/02 levels. These cuts hit hardest in areas such as social assistance and children and families.

BC’s surplus tells us that none of these cuts needed to happen. These ministry budgets could have simply been held in check, and the government would still have had a balanced budget or better this year.
Which brings us back to equalization. Equalization payments are for “have-not” provinces to spend on services that they could not otherwise provide. But the BC government has been cutting precisely those services, and will likely use higher equalization revenues to pay down provincial debt.

Equalization money cannot be cynically dismissed as “one-time” payments. The “one-time” payments are limited to the top-ups for 2001/02 to 2003/04. Surely, this $259 million could be used this year to buy a few MRI machines, to fund some seismic upgrading for schools, or to put a down payment on a provincial childcare program.

The fact of the matter is that the BC government is receiving large sums of money that are supposed to support programs. Equalization dollars should not go to debt reduction simply because the government does not feel like spending money on public services and programs. With provincial coffers overflowing, there is no excuse for withholding funds from those who are in need.
Marc Lee is an economist

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