BUDGET AND FISCAL PLAN — 2002/03 to 2004/05
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BUDGET AND FISCAL PLAN — 2002/03 to 2004/05 |
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Chapter 1: THREE-YEAR FISCAL PLAN |
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This is the government's first three-year fiscal plan since assuming office in June 2001. It continues the strategy started last year to revitalize the economy and it addresses a legislative requirement to balance the budget by 2004/05.
The plan is designed to bring government expenditures into line with revenues over the next three years through planned, phased spending reductions and measures to stimulate the economy. It is based on the current economic forecast and is built on the three-year service plans of ministries and Crown corporations released with this budget.
A provision has been included in 2004/05 in order to meet a legislative reporting requirement to expand the government's bottom-line to include elements of the larger public sector under generally accepted accounting principles.
The fiscal plan will be achieved through two strategies:
A structural fiscal imbalance occurs when underlying annual revenue growth created through the economy (removing the effect of short-term revenue spikes and windfalls, or recessionary shocks) cannot keep pace with ongoing annual spending.
The following chart shows that the surplus in 2000/01 was mainly the result of windfall revenue caused by a spike in energy prices. However, it also shows that the $2.3-billion budgeted spending increase in 2001/02 is unsustainable now that the energy spike has passed. This has resulted in a deficit of $3.4 billion for 2001/02.
The erosion of BC's tax and investment climate has contributed to this deficit. Over the last decade, BC's economy has lagged other provinces, its tax rates have become uncompetitive, investment has eroded and many people and businesses have left for other provinces.
In July 2001, the Fiscal Review Panel concluded that the structural fiscal imbalance created over previous years was not sustainable and could pose a serious threat to the future financial health of the province. The government was warned that without changes, it could face a deficit of nearly $4 billion by 2003/04. This status quo was unacceptable to the government.
The fiscal plan addresses this problem by reducing the deficit to $1.8 billion in 2003/04 — below the Fiscal Review Panel's projection — and restoring fiscal balance by 2004/05.
To reach a balanced budget however, the deficit will temporarily increase to $4.4 billion in 2002/03. This will allow the government to protect health and education funding despite weakened economic and revenue growth, while continuing to invest in measures necessary to restore economic competitiveness. It also provides time for ministries to complete the restructuring set out in their service plans.
The 2002/03 forecast includes a $750-million forecast allowance and it also recognizes $230 million of restructuring costs needed to prepare the way for balancing the budget in 2004/05.
Many of the economic and fiscal problems today have evolved over the last decade. Likewise, the economic change necessary to restore prosperity will take time and can't happen overnight.
The three-year fiscal plan assumes that with a recovery from the current economic slowdown, the combined positive effects of the strategies to build a strong and vibrant economy and eliminate the deficit will help to ensure that BC's economic and financial prosperity will continue well beyond 2004/05.
BC's economy suffered during the 1990s. A burdensome tax and regulatory environment, coupled with an untenable fiscal situation, seriously undermined investor and consumer confidence. The results speak for themselves:
The challenge is to create an economic environment that fosters confidence, innovation and productivity growth. Successfully meeting this challenge will ultimately lead to greater prosperity for all British Columbians. It will also help the government to meet its fiscal objectives and fund the health and education programs that British Columbians need by generating stable and sustainable revenues.
The British Columbia Government Strategic Plan 2002/03 – 2004/05 sets ambitious goals for improving the economic situation in the province in terms of increased investment, more job opportunities and higher incomes. The key elements of the government's three-year fiscal plan to achieve these targets are summarized below.
The government's overall strategy for restoring confidence in the economy and creating a stable and growing revenue base has four essential elements:
On June 6, 2001, as a first step toward renewing confidence in BC's economic future, the government cut personal income taxes by 25 per cent. British Columbians now have the lowest personal income tax rates in the country for the bottom two tax brackets.
The cut also lowered the top marginal income tax rate from the highest in Canada to the second lowest. This addressed a significant competitiveness issue that encouraged tax avoidance and undermined the province's ability to attract and retain the highly skilled people that are essential to securing BC's economic future.
The vehicle surtax threshold was also raised to $47,000 from $32,000. In total, the personal tax cuts will return more than $1.5 billion to taxpayers in 2002/03.
In the July 30 Update the government unveiled an aggressive timetable for restoring BC's business tax competitiveness. Key tax changes included:
In total these cuts will lower the business tax burden by more than $700 million annually by 2003/04.
The Budget and Fiscal Plan includes new measures to improve competitiveness, including increasing the threshold for the small business income tax rate to $300,000 and expanding the definition of parts that are eligible for exemption from provincial sales tax. These measures will return an additional $25 million to business in 2002/03.
In 2002/03 the personal and business tax cuts will total more than $2.1 billion. The increases to MSP premiums, the provincial sales tax rate and tobacco taxes to help fund health compensation pressures will total about $760 million. Thus the net tax cut in 2002/03 will be almost $1.4 billion.
In addition, the government will strive to ensure that the corporate income tax rate remains competitive.
The government has launched a comprehensive deregulation initiative designed to reduce regulations by one-third over three years.
Each ministry is preparing a three-year deregulation plan under the guidance of the Minister of State for Deregulation. At the same time, business stakeholders are participating in a red-tape-reduction task force to identify unnecessary and burdensome regulations.
This process is the most comprehensive of any deregulation initiative in North America and progress has already been made by:
Other initiatives that are underway include:
Business subsidies that provide an economic advantage to firms on a selective basis tend to undermine investor confidence. Subsidies create uncertainty because successful investors can never be sure whether the government will step in and offer artificial support for their less adept competitors.
In August 2001, the government established a framework for reviewing all ministry programs to determine which ones constituted business subsidies. The first phase of this review has now been completed and the business subsidies identified through this process have been eliminated.
The process of identifying and removing additional business subsidies is continuing.
The government is committed to a modern, efficient transportation and communications infrastructure based on innovative partnerships with the private sector.
The emphasis will be on developing public-private partnerships (P3s) that encourage innovative and flexible approaches to supplying the infrastructure and services needed for an efficient modern economy. Attracting private sector participation in the development of BC's infrastructure reflects the government's commitment to achieve the maximum benefit for every tax dollar invested.
This new approach should also allow BC to develop a world class capability in this area that can be exported to other jurisdictions.
BC's forest industry will remain an important nucleus of the provincial economy, particularly in areas outside the lower mainland. In the short term, the softwood lumber dispute with the U.S. poses a major risk to the health of the industry in BC. However, the government is introducing several initiatives to place the industry on a more secure and competitive footing for the future including:
The energy sector in BC is poised to assume an even more important role in the provincial economy. Provincial revenues from electricity as well as oil and gas have shown strong growth in recent years and there is considerable potential for future expansion.
The government established a task force to initiate a comprehensive review of BC's energy policy. An interim report was submitted in November 2001. On the electricity side, the report calls for:
It also advocates enhanced conservation, development of alternative energy sources and the consideration of coal as a possible source of electrical generation capacity. The Energy Policy Task Force is currently finalizing its report based on comments received from interested parties. The final report is due by March 15, 2002. The government will consider the recommendations with a view to securing the long-term future of the energy sector.
BC's oil and gas sector, in particular, is an emerging star of the provincial economy. It demonstrated significant growth during the 1990s. The government is working to accelerate the development of the industry through initiatives such as:
In January 2002, a report on the offshore oil and gas moratorium was submitted to the Minister of Energy and Mines by a scientific panel appointed by government. The government will consider the opportunities for offshore development based on the scientific evidence and the potential opportunities for northern coastal communities.
BC's mining sector has suffered through a turbulent ten years. In part this was a result of relatively low commodity prices, but it was also due to an uncompetitive tax regime, uncertain access to the resource and a complicated and often indeterminate environmental review process. However, the long-term prospects for the industry are bright.
The province has extensive mineral potential and the recent tax changes have improved competitiveness considerably. The government is committed to improving the certainty of access to the resource by adopting "go" or "no go" designations for exploration and development. Regulatory requirements will be streamlined while ensuring that high environmental standards are maintained. The province will also work with the mining industry to increase economic opportunities for First Nations.
With these changes and with some recovery in prices, there are realistic prospects for several new mines to open in the province during the next few years.
The Premier's Technology Council believes that BC can become one of the leading technology centres in the world. Based on a realizable annual growth rate of 10 per cent, high-tech could become the largest industrial sector in the province within ten years.
The government has already taken several steps toward achieving this growth target, including:
Beyond these substantial steps, the government is committed to additional initiatives to encourage the sector, including:
Through a combination of carefully designed tax incentives, a skilled work force, excellent facilities and an attractive exchange rate, BC's film and television industry has blossomed in recent years. There is considerable potential for further expansion.
In particular, opportunities exist in animation and new media, and over the next several months the government will consider the possibility of introducing changes to provide additional encouragement in these exciting new areas.
Tourism has been a mainstay of the provincial economy in recent years and has been a source of growth throughout the province. The government is committed to doubling tourism's contribution to BC's economy through initiatives such as:
In 1995, a moratorium was imposed on new marine salmon farm tenures. An Environmental Assessment Office scientific review, completed in 1997, concluded that, as practised, the risks of salmon aquaculture to the environment were low. The review made 49 recommendations that would further reduce risks of salmon aquaculture, all of which were accepted in full by government and industry.
Many of the recommendations have already been adopted. Improved and new policies for fish escapes, fish health, pen siting and relocation, fish waste, and research and development have been developed and will be finalized by April 30, 2002.
New comprehensive environmental standards and practices will allow for the managed expansion of the salmon aquaculture industry in BC beginning April 30, 2002.
BC farmers will benefit from a more regionally responsive Agricultural Land Commission. In addition, government will gradually phase-out subsidies to generate greater competitiveness, self-regulation and independence in agriculture.
To encourage additional research and development in agriculture, BC will mirror the recent federal announcement to make farm producers who contribute funds for research and development eligible for investment tax credits.
In addition to increasing the threshold for the small business income tax rate, the small business community will benefit from many of the government's earlier tax cuts.
Small businesses have consistently argued that the cost of interacting with government is too high. The Premier will lead a series of roundtables on small business to seek advice on how to reduce these costs, remove barriers to expansion and create new opportunities for growth. Many of the deregulation initiatives such as the review of the WCB and employment standards will be of particular benefit to small businesses. In addition, the introduction of a new Company Act will provide a modern operating framework for businesses of all types.
Realizing the full economic benefits of this comprehensive and far-reaching strategy will depend on ensuring the world is aware of BC's new economic vitality.
Other jurisdictions have had considerable success in establishing a "brand" that reinforces their economic vision. The government is currently developing a similar campaign to market BC as an attractive place to work, live and invest.
The government places a high priority on encouraging a thriving private sector economy that creates high-paying jobs, maintains high environmental standards and respects the strong environmental values of British Columbians.
BC's economy is based both on the direct use of natural resources (for example, by forestry) and on activities (such as tourism) that depend strongly on natural diversity and environmental quality.
Prudent management and protection of the natural environment will help ensure that the benefits we enjoy today will be available for our children and grandchildren in the future.
The government is committed to the following environmental principles as it works to develop a vibrant economy that supports the social and environmental values of British Columbians:
In the new economy, BC's economic prosperity will depend on a high quality, relevant education system that equips students with the skills and knowledge they need. To achieve this goal, the government is refocusing the education system to increase the emphasis on students, to increase accountability and to make the system more flexible and responsive.
Key initiatives include:
Although BC's economy suffered through a difficult decade in the 1990s, the province has all the fundamental characteristics needed for economic success. The government's economic strategy is designed to unleash this underlying potential. The four key elements to building a strong and innovative economy and securing BC's economic future are:
The government is well on the way to achieving its goals in these four areas and is committed to meeting these strategic requirements into the future.
The result should be increased innovation and investment in the economy, more and higher paying jobs, a stable and sustainable revenue base for funding government programs and a bright economic future for BC.
The fiscal plan shows that after excluding the one-time pension gain in 2001/02, the deficit will increase $1 billion to a total of $4.4 billion in 2002/03. It will be cut by more than half to $1.8 billion in 2003/04 and eliminated by 2004/05.
The revenue forecast is based on the current economic forecast set out in Chapter 2. Despite a brief pause in 2002/03, over the next three years CRF revenues are projected to increase about $1.5 billion or 6.4 per cent from the 2001/02 revised forecast (see Table 1.2).
The forecast incorporates the full-year effects of over $2.1 billion of tax reduction measures announced last year plus further reductions in this budget.
It also incorporates new measures introduced to provide funding for regional health sector compensation pressures and to address a recent arbitration decision on physicians' compensation (see Section 1.5 — Revenue Measures for further details).
Revenue is expected to decline 3.6 per cent in 2002/03. This reflects:
After factoring in tax competitiveness and other measures, total revenue measures in 2002/03 are reduced to $736 million.
In 2003/04 and 2004/05, revenue is projected to grow an average 5.1 per cent per year. A more competitive tax structure, rising consumer and business confidence and a recovery in the North American and provincial economies are expected to contribute to strengthening commodity prices, new investment and employment growth.
Details on the three-year revenue outlook are shown in Table 1.2. Based on the 2001/02 revised forecast, highlights of major revenue changes include:
After weakening in 2002/03, overall taxation revenue in the following two years will begin to pick up. This reflects a recovery in the economy in part due to the tax reduction and investment measures started last year and new measures in this budget.
A higher tobacco tax rate in 2002/03 will result in a 33-per-cent increase in tobacco tax revenue by 2004/05. Corporation capital tax revenue will decline due to the tax-competitive measures introduced last year while other sources will grow generally in line with the economy.
Revenue will increase 3.1 per cent over the three-year period. A 10.7-per-cent drop is expected in 2002/03 mainly due to lower assumed electricity prices and forest harvest volumes reflecting weak U.S. demand and economic growth in 2002.
Over the following two years, revenue will recover as commodity prices rise with strengthening global economies and increased electricity sales under the Columbia River Treaty, and grow an average 7.5 per cent per year.
Electricity sales under the Columbia River Treaty show a significant drop in 2002/03 due to lower assumed electricity prices in the U.S., but will pick up in the next two years due to higher volume entitlements under the treaty.
Appendix Table A9 provides the fiscal plan's key economic and other assumptions for the main revenue sources over the next three years. The table also provides estimates of the sensitivities of revenues to changes in individual assumptions.
The revenue measures included in the Budget and Fiscal Plan are designed to:
The changes that will help to offset the almost $800-million cost of health care sector compensation pressures in 2002/03.
Other tax changes include:
To build on the process of improving BC's tax competitiveness:
The major streamlining and fairness measures include:
Compared to the July 30 Economic and Fiscal Update, overall government spending will fall by $974 million or 3.9 per cent by the end of the next three years. After a 1.8-per-cent budget increase in 2002/03, mainly to fund high-demand health professionals and workers, including physicians, annual spending will decline by about 2.8 per cent in each of the following two years.
Ministry spending, including the Premier's Office, will show an overall decline of 4.8 per cent by 2004/05. This decrease is partially offset by increasing costs for debt interest.
The spending plan is based on the ministry three-year service plan summaries announced on January 17, 2002. It has been updated to incorporate additional funding provided for physicians, health authorities and other areas, and it also includes spending plans for special offices, contingencies, restructuring and debt interest.
Table 1.4 provides a summary of changes to ministry spending plans since the January 17, 2002 announcements. The most significant changes reflect required increases to Medical Services Plan premiums and the social service and tobacco tax rates to help pay for additional funding for health sector compensation.
Details of ministry three-year spending plans are shown in Table 1.6 and in ministry service plans being released with the budget. Key assumptions and sensitivities are provided in Appendix Table A10.
The fiscal plan includes a provision for one-time restructuring costs to assist ministries with restructuring needed to achieve their service plans. These costs include severance, facility closures and costs to consolidate and relocate operations.
A provision of $490 million for operating costs and $60 million for capital costs is included in the fiscal plan. It is expected that all restructuring will be completed by March 31, 2004. The following table shows the projected deficits over the plan, excluding forecast allowances, the one-time joint trusteeship adjustment in 2001/02 and the non-recurring costs of restructuring. Further information is provided in a topic box.
The following is a summary of major ministry changes during the next three years. Additional information is found in the individual ministry service plans.
Ministry of Advanced Education's budget is increased by $8 million in 2002/03 to provide for the cost of Medical Services Plan premium increases in the post-secondary sector. Given that the ministry's budget is otherwise held constant, it has developed strategies to manage wage, demand and inflation pressures. The ministry will:
The ministry will:
The ministry will:
The new Economic Measures Program ($10 million per year for three years) will contribute to an improved investment climate in the province and provide economic opportunities for First Nations.
The treaty negotiations strategy will change from comprehensive treaty making to incremental treaty making.
After a referendum on treaty negotiations, the office will implement the results and develop negotiation options for dealing with the land question.
A major reorganization of the office, along with reductions in transfers and elimination of funding for advisory bodies, will result in estimated savings of $6 million.
The ministry will:
The ministry will:
The ministry will:
The ministry's budget is increased by $19 million in 2002/03 to provide for the cost of Medical Services Plan increases in the K-12 sector. Given that the ministry's budget is otherwise held constant, it has developed strategies to manage wage, demand and inflation pressures. Its key strategy is to provide school districts with tools to increase productivity in the K-12 system, for example through more flexible class size limits and by eliminating mandatory non-enrolling teacher ratios (estimated savings: $306 million over three years).
The ministry will:
The ministry will:
The ministry will:
The health ministries' budgets increase by $685 million in 2002/03, primarily to fund high-demand health professionals and workers, partially offset by a $5-million reduction due to one-time funding in 2001/02. Of this, $365 million is added to address compensation increases in the regional health sector and to provide for the cost of Medical Services Plan premium increases in the regional health sector, and $320 million is added for the estimated cost of the interim award in the arbitration of the Working Agreement with the British Columbia Medical Association. Given that the ministries' budgets are otherwise held constant, they have developed strategies to manage additional wage, demand and inflation pressures. The ministries will:
A topic box on federal funding of health care is provided in this chapter.
The ministry will:
The ministry will plan and implement a shared services program for the delivery of certain transactional and administrative services across government (e.g. accounts payable, travel voucher processing, etc.).
The Public Service Employee Relations Commission is responsible for the delivery of government's three-year workforce adjustment program designed to reduce the size of the direct public service.
The ministry will increase its focus on revenue and accounts receivable collection and enforcement activities.
The ministry is expected to generate an additional $35 million in net revenue to the province by 2004/05.
The ministry will:
The ministry will:
The ministry will:
The ministry will:
The ministry will:
The ministry will have fewer staff and resources directed to:
Crown corporation finances are forecast to improve significantly from a combined net loss of $574 million in 2001/02. In 2002/03, combined net losses are projected to fall to $132 million and by 2004/05 they will be reduced to a $97-million loss. The forecast is based on the service plans approved by the Boards of Directors of the various Crown corporations (see Table 1.7).
The forecast assumes that operations of Forest Renewal BC, Fisheries Renewal BC and Duke Point Developments Ltd. will be wound up effective 2001/02.
The government is continuing its core services review of the operations of Crown corporations. As well, there are number of other initiatives, such as the Energy Policy Review, that will likely affect the future of Crown corporation activities. As these reviews are completed, the service plans will be updated to reflect new directions and decisions of the Boards of Directors.
Details of the forecast are shown in Table 1.7 and in the three-year service plans of Crown corporations. Key assumptions used in the forecasts are shown in Appendix Table A11. They do not incorporate the effect of new revenue measures introduced in this budget. The following provides a summary of operating assumptions and changes for selected Crown corporations over the next three years.
The corporation plans to:
The corporation plans to:
The corporation plans to:
The branch plans to:
The corporation plans to:
The corporation plans to:
The corporation plans to:
Capital spending is needed to maintain the province's existing asset base, to replace ageing infrastructure and to meet the needs of a changing population. Financing to build schools, hospitals, long-term care facilities, roads, dams and other forms of provincial infrastructure is largely met through borrowed funds and is a major component of provincial debt.
Over the next three years, combined capital spending of the government and taxpayer-supported and commercial Crown corporations will fall to $2.2 billion. This decline reflects two principle changes:
In 2002/03, total capital spending will increase by $237 million to total $2.7 billion. The increase mainly reflects higher commercial capital spending by BC Hydro. After 2002/03, total capital spending will be reduced $534 million by 2004/05.
Taxpayer-supported capital spending includes schools, hospitals, universities and transportation projects covered in the government's capital plan, plus minor capital purchases by ministries and other minor taxpayer-supported agencies.
Commercial Crown corporation capital spending includes projects undertaken by BC Hydro, BC Rail, ICBC and for Columbia Basin power projects.
Significant changes in capital spending over the next three years include:
Further detail on capital spending over the three years is shown in Table 1.8 and in ministry and Crown corporation service plans.
Starting in 2001/02, some major changes are being introduced that will affect how capital expenditures are being planned, financed and implemented. This will assist the government to achieve the capital and operating targets assumed in the fiscal plan. Further details are provided in a topic box.
As required under the Budget Transparency and Accountability Act, significant capital projects with multi-year budgets totalling $50 million or more are shown in Table 1.9. Annual allocations of the full budget for these projects are included as part of the provincial government's capital spending shown in Table 1.8.
By 2004/05, total spending on these major projects will decline $572 million from the $734 million forecast for 2001/02, reflecting the completion of projects. By March 31, 2005, $4.6 billion will have been spent on major capital projects including:
Under the fiscal plan, provincial debt is projected to increase from $36.4 billion to $43.9 billion over the next three years primarily due to the cumulative effect of annual deficits and capital spending. However, as the deficit is reduced to zero, the rate of annual debt increases will slow.
The ratio of taxpayer-supported debt, which excludes commercial Crown corporations and other self-supported debt, to GDP is a key measure often used by financial analysts and investors to assess a province's ability to repay debt. Based on the budget economic forecast, taxpayer-supported debt as a percentage of provincial GDP will increase to 25 per cent in 2003/04. With economic recovery underway, and elimination of the deficit, the ratio is forecast to decline to 24.2 per cent by 2004/05.
Taxpayer-supported debt includes debt for government operating and capital purposes, and debt of Crown corporations and agencies that require a subsidy from the provincial government.
Over the next three years, taxpayer-supported debt will increase $7 billion due to the annual operating and capital requirements under the fiscal plan. However after 2002/03, annual debt increases will gradually be reduced in part due to the declining deficit each year as well as lower capital debt requirements resulting from the completion of projects and the new capital management framework (see topic box on New Approach to Capital Planning).
Self-supported debt includes debt of commercial Crown corporations and the warehouse borrowing program. Commercial Crown corporation debt is generally used only to finance capital since enough revenue is earned through the sale of services at commercial rates to cover operating expenses, interest costs, and debt repayments. Warehouse borrowing is used to take advantage of market opportunities to borrow in advance of requirements and remains invested until it is needed by the government or its Crown corporations and agencies.
By the end of 2004/05, self-supported debt will fall $224 million, due to a drawdown of the remaining $1.1 billion in the warehouse borrowing program in 2002/03, partially offset by increased commercial debt for BC Hydro and Columbia River power projects.
The forecast assumes a borrowing allowance of $750 million in 2002/03 to mirror the forecast allowance used in the summary accounts forecast. Should the government not require this allowance, projected debt levels under the fiscal plan would be $750 million lower for 2002/03 and each subsequent year (see Table 1.10).
In 2002/03 taxpayer-supported debt is forecast to increase to 24.3 per cent of GDP and to 25.0 per cent of GDP in 2003/04. In 2004/05, it is expected to decline to 24.2 per cent of GDP. Taxpayer-supported interest costs are expected to increase to 8.6 cents per dollar of revenue in 2003/04 and remain unchanged in 2004/05.
Further details on the debt outstanding for the government, Crown corporations and agencies are provided in Appendix Tables A14 and A15.
In 2002/03, provincial debt will increase $4.3 billion to total $40.7 billion. This change reflects:
Details of the change in debt in 2002/03 are provided in Table 1.11 and in the Summary Accounts Balance Sheet (Appendix Table A13).
Information has been provided in the Budget and Fiscal Plan on the major economic and policy assumptions underpinning the fiscal plan. These are accompanied by sensitivity estimates in order to provide an assessment of how individual fiscal forecasts could change as a result of changes to major assumptions.
Overall, the government considers the assumptions presented in the fiscal plan to be in the middle of the range of reasonable expectations, and that in aggregate they result in the most likely forecast of the summary accounts results for each of the years presented in the fiscal plan.
Like all financial plans, there are uncertainties that present risks to the forecast. Some risks, such as higher-than-expected commodity prices, may potentially result in better-than-expected revenue for the government and some of its Crown corporations. Other risks, such as drier-than-expected weather, could result in higher-than-expected forest fire-fighting costs.
Risks can also sometimes be offsetting. For example, in 2001/02 the effect on government revenue of lower-than-expected energy prices was partially offset by higher-than-expected income tax assessments for the previous year.
Changes to the revenue forecast can result from a combination of factors. These include changes in economic conditions, policy changes implemented mid-year, and other unpredictable events such as changing weather patterns, commodity prices, foreign trade restrictions, labour disruptions and delays in receiving current federal information on the income tax bases.
The revenue forecast contained in the fiscal plan is based on the budget economic forecast detailed in Chapter 2. Details on major assumptions and sensitivities resulting from changes to those assumptions are shown in Appendix Table A9.
Highlights of significant uncertainties:
Single changes or combinations of changes in assumptions can affect government revenue in different and sometimes unexpected ways. Depending on specific assumptions, a 1-per-cent change in provincial nominal GDP (the main driver of provincial revenue) could result in an overall change in revenue of approximately $200-$300 million (excluding commodity price impacts).
The spending forecast contained in the fiscal plan is based on ministry spending plans and strategies. Details on major assumptions and sensitivities resulting from changes to those assumptions are shown in Appendix Table A10 and in ministry service plans.
The government and its ministries have several options for dealing with major financial risks, should they arise. Ministries may take action to mitigate the impact through specific or general cost reduction measures or reductions in service levels. In addition, the fiscal plan includes an annual $210-million contingency reserve for use by the Minister of Finance in managing the overall spending plan.
Highlights of spending risks:
With the exception of funding for the interim arbitration award for the British Columbia Medical Association and for the regional health sector, the fiscal plan does not provide incremental funding for compensation settlements currently in effect or to be negotiated within the fiscal plan timeframe. During the 2002/03 through 2004/05 period, virtually all collective agreements expire. Collective agreements expiring over the next three years will be settled under a new bargaining mandate.
The government funds a number of demand-driven programs such as Pharmacare, K-12 education, student financial assistance and income assistance.
The nature of demand-driven programs is that eligible clients receive service. The budgets for these programs reflect the best estimate of demand and other factors such as labour costs and price inflation. If demand is higher than estimated, this will result in a spending pressure to be managed.
The vast majority of government funded services are delivered through third party delivery agencies that provide programs such as acute and continuing health care, K-12 education, post-secondary education, and community social services. All of these sectors face cost pressures in the form of program demand, non-wage inflation and compensation increases.
The provincial government recently implemented legislative changes to provide public sector delivery agencies with greater flexibility to determine how they will deliver services. The lower cost structure made possible by the recent legislative changes and upcoming accountability contracts with public sector delivery agencies is reflected in the 2002/03 budget and the three-year fiscal plan. If public-sector delivery agencies are unable to achieve the estimated savings, budgetary pressures could arise.
The government is committed to negotiating affordable, working treaties with First Nations that provide certainty, finality and equality. A treaty referendum will give British Columbians a say in treaty negotiations and revitalize the treaty process. Outcomes of negotiations could affect both the economic outlook and fiscal plan.
Ministry restructuring costs are based on preliminary estimates. Restructuring is a complex and detailed undertaking that will take some time to plan and implement. The fiscal plan includes $550 million in non-recurring operating and capital costs related to ministry restructuring. This estimate is based on assumptions around the number of people expected to leave government and the average cost of their departure, assumptions around reduced requirements for office space, and other costs such as systems changes.
As ministries implement their restructuring plans, better estimates of actual costs will become available. This could result in restructuring costs being higher or lower than assumed in the fiscal plan.
The spending plans for the Ministries of Forests, Public Safety and Solicitor General, and Water, Land and Air Protection include amounts to fight forest fires and other emergencies such as floods and blizzards. These amounts assume normal to moderate conditions and severity of costs, based on a ten-year historical average of actual spending.
Express provisions are not included for catastrophes or disasters beyond the amounts already identified in ministry service plans. Costs of such unforeseen events may also affect other ministry programs.
The three-year spending plan for the Ministry of Attorney General contains provisions for settlements under the Crown Proceeding Act based on estimates of expected claims and related costs of settlements likely to be incurred. These estimates are based on a historical ten-year average of actual spending.
Litigation developments may occur that are beyond the assumptions used in the plan (for example, higher-than-expected volumes or size of claims and the timing of settlements). These developments may also affect expenditures in other ministries.
A number of ministry spending plans assume that a portion of expenditures will be recovered from other agencies. The spending plan assumes that budgeted recoveries will be fully realized.
The overall spending forecast does not make allowance for unusual or extraordinary items other than the amount provided in the Contingencies vote or in ministry spending plans.
Government has committed to fully adopt generally accepted accounting principles (GAAP) by 2004/05. This means potentially changing government accounting policies in three areas (see the Compliance With Generally Accepted Accounting Principles topic box):
Recommendations relating to SUCH and tangible capital assets are currently under review by the Canadian Institute of Chartered Accountants (CICA) and may change before the end of 2004/05. These recommendations may affect the fiscal plan.
The fiscal plan includes a $100-million loss provision to reflect the estimated impact of including the SUCH sector in 2004/05. As reliable information on operating results for the SUCH sector is unavailable, an estimate of non-provincially-guaranteed SUCH sector debt is not included in the plan.
Including SUCH would largely remove the prepaid capital advance issue. The plan assumes that GAAP recommendations regarding tangible capital assets will be changed by 2004/05, to conform with the government's current accounting practice. If the CICA does not change its recommendations around tangible capital assets, this would adversely affect the government's bottom line because of a requirement to expense capital assets.
Crown corporations and agencies have provided their own forecasts that were used to prepare the fiscal plan, as well as their own statements of assumptions. Details of major forecast assumptions are shown in Appendix Table A11. The various boards of those corporations and agencies have included these forecasts, along with further details on assumptions and risks, in the service plans being released with the budget.
The fiscal plan does not assume or make allowance for unusual or extraordinary adjustments other than those noted in the assumptions provided by the Crown corporations and agencies. Factors such as weather, electricity prices, fuel costs, accident trends, interest and exchange rates, or pending litigation could significantly change their financial forecasts.
The government is continuing its core services review of the operations of Crown corporations and agencies. As well, there are number of other initiatives, such as the Energy Policy Review, that could affect the future of Crown corporation and agency activities. As these reviews are completed, the service plans will be annually updated to reflect new directions and decisions of the Boards of Directors.
New decisions or directions by the Boards of Directors may result in additional costs due to restructuring, valuation allowances and asset writedowns, or gains and losses on disposals of businesses or assets.
The capital spending projections assumed in the fiscal plan do not include potential projects such as:
The provincial share of the total costs for these projects has not been estimated because the role of the province and the scope and structure of these projects have not been determined.
The capital spending forecasts assumed in the fiscal plan may be affected by various factors including:
As the financial impact of these uncertainties is difficult to estimate and because changes in one direction are often offset by changes in another direction, a monetary value is not provided in the fiscal plan.
In 2002/03, the government will continue to apply a forecast allowance to the summary accounts bottom-line, to account for risks to revenue, expenditure and Crown corporation forecasts and to increase the likelihood of meeting the forecast targets established in the fiscal plan.
A forecast allowance of $750 million — over three per cent of revenues — is included in the 2002/03 budget. This forecast allowance increases the expected deficit from the government's most likely forecast of $3.65 billion in 2002/03 to a more conservative forecast of $4.4 billion.
A $750-million borrowing allowance has also been included in the provincial debt forecast for 2002/03, to mirror the summary accounts forecast allowance.
Forecast allowances are not included in the fiscal plan for 2003/04 and 2004/05. Over these two years, the government will take further action as necessary and will incorporate annual forecast allowances with the budgets for those years based on a risk assessment at that time.
The starting point for the three-year fiscal plan is based on the revised forecast for 2001/02. Excluding the one-time joint trusteeship gain, the deficit for 2001/02 is projected at $3.4 billion, an increase of $0.6 billion since the July 30 Update. Further details on the 2001/02 revised forecast are presented in Chapter 3.
Table 1.12 provides a summary of how the fiscal plan has evolved since the July 30 Update presented last year. It incorporates a number of developments in 2001/02, such as low energy revenues, the recent physicians' interim arbitration award and the resultant decisions to raise revenues. It also includes the results of ministry and Crown corporation service plans.
The table itemizes the main changes expected over the next three years. The most significant changes are a recovery in revenues after 2002/03 as the economic recovery takes hold, and the decline in spending by 2004/05 due to the effect of ministry spending plans.
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BUDGET AND FISCAL PLAN — 2002/03 to 2004/05 |
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