Gloomy forecast sinks balanced budget plan

Amid all the gloom - and there was buckets of it - a glimmer of good news shone through Finance Minister Kevin Falcon’s quarterly report on the province’s finances and economy this week.
Mostly, the news was bad. The outlook for the economy is worse than it was three months ago, and it wasn’t great then. The deficit for the year is now forecast at a record $3.1 billion, $331 million worse than Falcon predicted in his last forecast. (Though the actual number is misleading, since about $1.6 billion reflects the one-time HST incentive to be repaid to the federal government .)
And things could get still worse in the coming months.
The good news is that Falcon is backing away from the ill-considered and potentially disastrous commitment to balance the budget by 2013-14.
Falcon still says that’s his goal. But he now acknowledges the target might be impossible.
British Columbians should heave a collective sigh of relief.
Sure, it’s embarrassing for the government to have to adjust its deficit target again and the whole notion of balanced budget laws is starting to look silly. The Liberals introduced a law making deficits illegal beginning in 2004. They amended it in 2009 to allow two years of deficits, then amended it again to allow two more years. Now, it looks like there’s a good chance of a new amendment, meaning the laws on balanced budgets changes about as often as the ministers responsible for Community Living B.C.
But clinging to the target would be destructive, with the goal of a balanced budget by 2013-14 achieveable only with deep spending cuts that would slash services and hurt the economy.
Falcon is in good company. Federal Finance Minister Jim Flaherty said last month the Harper government won’t likely balance its budget until 2016, two years later than the budget promised. The Ontario government expects to run deficits until 2017, and that target appears optimistic.
What’s happening is a return to traditional Keynesian economic theory. Governments should budget for surpluses when times are good and use money to pay down debt, the approach dictates.
But when there is a recession, governments should be prepared to run deficits both to maintain services and avoid weakening the economy further by reducing demand.
The real-world risk is that governments never quite get around to balancing the budget when times are good, meaning mounting debt, higher interest costs, an increasing burden for future generations and, as we’re seeing in the case of Greece, a nasty day of reckoning when lenders won’t extend more credit.
B.C. is a long way from that point; the province’s credit rating is good and the debt-to-GDP ratio moderate.
Falcon can’t be made to wear all the blame for the growing deficit. The Finance Ministry’s assumptions about economic growth were more moderate than the independent panel of economists that advises government. The problem is that things keep getting worse than expected.
The U.S. economy is stalled, Europe is in crisis and demand in China is falling. B.C.’s export-dependent economy is being badly hurt by reduced demand and falling commodity prices.
And falling financial markets have meant losses in ICBC’s investment portfolio, with the result that the government now forecasts the corporation won’t be able to deliver the budgeted $290 million in revenue.
At the same time, the government can be criticized for unrealistically low spending budgets, which have created crisis in the courts and Community Living B.C.
The expense budgets are even more out of whack for the next two years. Most ministries face two years of budget freezes; health spending is forecast to rise three per cent in each of the next two years, half the rate of the increase this year.
All of which makes the balanced budget target even more out of reach — and Falcon’s retreat even more welcome.
Footnote: Falcon delivered some additional bad news. The move from the HST back to the PST is more complicated, and going more slowly, than anticipated. It looks like the change will take a full 18 months, until March 31, 2013. That’s bad for homebuilders and other economic sectors, and for the Liberals.