B.C.'s project $13.8 billion deficit: how much deeper could it get?

0:00Let's turn now to BC's finances, which have taken a bit of a turn and it is not looking good. Yesterday, finance, Mr. Josie Osborne revealed the projected deficit in this province increased to $13.8 billion. That is $450 million higher than what was forecast in February. The government is pointing to a costly wildfire season, trade uncertainty and a calculation error involving natural gas revenue. Yesterday, Mr. Osborne was on the Jazz Jail Hall show and I asked her about the impact of the latest tariffs on BC's economy. By the way, BC is the most exposed to tariffs. The most recent tariffs initiated by Donald Trump do impact BC businesses disproportionately compared to some of the other provinces. But on the whole, BC is very fortunate for less trade exposure overall and to the U.S.

1:04and having a more diversified economy to begin with. And we have real advantages here. We also had on Peter Millibar yesterday to get his take on who and what the province is blaming. Take a listen to what he had to say. We've seen that year over year, which is government. They continue to add more taxation. They're collecting record revenues off of taxation, all sorts of new taxation. I think we're up to 36 newer increased taxes and they can't bring it in. They're spending is out of control. When you think of it, the year end fiscal update not too long ago had a record $7.7 billion deficit in it. We are now talking about a deficit in the very next fiscal year that has almost double that. That is how badly they have got out of control with their spending. Let's bring in David Williams, vice president of policy with the BC council, with the BC business council. David, thanks so much for joining us. Good afternoon, Robert. Thanks for having me.

2:04Okay, let's take a look at this number, $13.8 billion. Were you blindsided by this number or did you expect this deficit to disgepiger? Not at all. I mean, contrary to what you said in your intro, I don't think we're at a turning point and that's actually the problem. We're on the same trajectory that we've been on for the past five years. I've said this a number of times. It's not our fiscal position that's concerning. I mean, it is concerning, I should say. But it's the trajectory that's alarming and the speed at which BC's public finances have deteriorated over the last five years is really quite extraordinary and quite worrying. And that's why the credit rating agencies have taken British Columbia from a top tier credit rating in 2021. We're at AAA credit rating in July of 2021, the same as Zurich, by the way. We've had five consecutive downgrades in the last five years and we've now dropped

3:05to being the lowest credit rating of any peer jurisdiction in the world. And we have a negative outlook. We're now rated A and we've gone from the fiscal strength of Zurich essentially to the fiscal strength in Prince Edward Island, all in the space of five years. It has been a very, very rapid decline. And unfortunately, this latest update shows no sign of slowing down in that there is no path to the stabilization of BC's public finances. David, for people who don't understand what this credit rating means for the province, could you explain that? Yeah, so the government doesn't raise enough revenue to cover its expenses or to pay for the capital plans of the building of hospitals and schools and so forth. And so it has to borrow to do that. And when it goes into international markets, pension funds and international investors buy bonds that the government issues.

4:06And the better the credit rating that we have, the more credit worthy we are and therefore we get to borrow at the cheapest rate. Kind of like when you go for a mortgage, right? And the bank gives you the best possible rate because you've got a really high credit score and you've been really good at paying your mortgage over the years. You're just seeing as a good credit risk. But if you're not seeing as a good credit risk, well, they start to take a second look at you and you have to pay a little more to do it. And what that means in the budget is, you know, we all have to pay our taxes and part of those taxes go towards interest payments, just to service the government's debt. Now British Columbians are used to paying about $530 per person per year to fund the interest on the government's debt. That number goes to $1500 across the forecast horizon, meaning it triples. So British Columbians are spending triple the amount that they were just five years ago

5:09to just to serve as interest on government debt. You don't, you don't, not paying it down. It's just the interest. And what that means also is that the, the, the government may wish to spend on other things like schools and the protection of persons and property or low income transfers on the things. And those sorts of things get crowded out when interest payments rise. We just don't have the money to do the things we might like to do. Part of the blame was on this, this trade war and the tear of situation, but it keeps escalating as you know, tariff, counter-tariff, tariff, counter-counter-tariff. How long can they use that as an excuse? That's, you know, creating more uncertainty as well. I think it's completely irrelevant. Revenue is actually up $800 million. So the deterioration and the budget balance isn't coming from the revenue side. It's coming from the spending growth. The government's been unable to control the spending growth. You know, keeping on blaming Donald Trump is a bit like, you know, playing in a 20 team

6:13sports league. And your teams at the absolute bottom of the ladder and your, your, your rational is that you've had a few referee decisions that went against you during the season, right? It's like something is seriously wrong with the, the spending controls of the government. Because in the past five years, we've had a 41% increase in operating spending and our revenues have only grown by 19%. So you know, I'm sure most of you listens, but understand this. It doesn't matter whether you're running a household, a business, a government, or a lemonade stand. You can't grow your spending at twice the pace of your revenues and borrow the difference, at least not for very long. And what the credit rating they just is saying is they're really running out of road with this strategy. They've issued some pretty damning press releases in the last few years about the government's fiscal performance. And they've been very clear that our fiscal deterioration is a result of domestic policy

7:13choices. It's our spending controls that are missing, particularly in the health portfolio. We've really had runaway growth in spending. And I think British Columbia's would be forgiving of that if the quality of health outcomes was improving, but I don't think that's what we're seeing. I want to ask you a question about the calculation error. I mean an accounting error essentially. And that was involving the natural expected natural gas revenue. How does a mistake like that happen? Well, mistakes do happen. It's unfortunate. We're at about half a billion dollars this year. So it's unfortunate, but it may speak to the broader concern that the ratings agencies have raised, which is that what are you spending controls? What are the controls? The quality control of your budget process like, because every time we've had an update just about for the past five years, and we get a budget in the February and we get an

8:15update in about September, like we did yesterday. And every time we've had an update, it turns out that spending for the current year has been revised up again and again and again and again. Each time the government has said that it's going to taper off the spending growth, and they'll get the spending under control, but we get the next update and turns out that they haven't. As I mentioned, revenues are up $800 million. Perhaps the government should be sending the White House a box of BC1 to say thank you for the global inflation that has led to higher tax receipts from personal income taxes and corporate income taxes because nearly an extra billion dollars to the government's coffers right there. So higher inflation and higher global commodity prices at the moment have really lifted the revenue line for the government and really saving the government's bacon to a point. I mean, it could have been much worse.

9:16We only saw a $450 million deterioration in the budget bottom line, but it could have been worse without those that lift from higher inflation, which lifted personal and corporate income tax receipts and higher commodity prices. So those sorts of things cut the other way. Contrary to the government's narrative that global events are really the responsible for the fiscal deterioration. I just don't think that holds much water. I love the idea of sending a case of wine to the White House, but they might tax. Thanks for the global inflation. Thanks for inflation being 3%, not 2%, as we were expecting. And that's really bad for households. We have a real challenge around affordability in the province. And at the budget time, the government announced a $5 billion worth of tax increases over the next three years. They've expanded the provincial sales tax. They've increased the lowest tax rate for personal income tax.

10:19And most importantly, they've frozen the indexation of personal income tax thresholds. So when workers get a wage increase that just keeps them whole with inflation, they won't get any adjustment in their personal income taxes. They will be pushed automatically into higher and higher tax brackets. And that's a huge win for the government when it turns out that inflation is even higher than expected. David, we have to live it at that, but I really appreciate your time on the show. Thanks very much, Robin.