Fiscal Review Panel sounds false fiscal alarm, says Canadian Centre for Policy Alternatives

Panel forecasts based on hyper-conservative revenue assumptions
July 23, 2001

(Vancouver) BC's Fiscal Review Panel presented its report today. Upon reviewing the report, the CCPA is concerned that it will be inappropriately used by the government to justify spending cuts and privatization that are not warranted.

Like the 1993 Alberta Fiscal Review Panel, the BC report claims the province is facing an unsustainable structural deficit. According to the CCPA, however, the report is overly alarmist about BC's fiscal situation.

The report assumes large increases in expenditure growth. However, the panel projects that revenue increases will be very small -- indeed, that revenue will fall in 2002/03 (even before accounting for the tax cut) and will increase only modestly in 2003/04. This would be virtually unprecedented.

"The Panel's low-ball revenue forecasts are inconsistent with historical norms, and with the Panel's own economic growth projection of 2.9% next year," said Marc Lee, Research Economist with the CCPA. "The panel has artificially constructed a crisis in the government's fiscal situation."

A key factor in the Panel's deficit projection is its assumption that energy prices are going to fall considerably. This is pure speculation by the Panel -- not evidence of a structural imbalance -- and is contrary to many estimates about the future direction of energy prices.

"The Alberta Fiscal Review Panel made this same mistake," said BC Director Seth Klein. "The Alberta Panel dramatically underestimated resource revenues, created a false fiscal crisis, and resulted in unnecessary and harmful cutbacks. We would encourage BC not to go down the same road."

Another factor driving up the Panel's large projected deficits is the inclusion of very large and growing forecast allowances, equivalent to approximately one third of the forecast deficits. These generous revenue cushions add to the sense of crisis in the Panel's report.

"If the government responds to the Panel by cutting spending, it risks slowing the provincial economy," said Marc Lee. "Ironically, this would increase the size of the deficit."

Interestingly, the Panel's report finds election campaign claims about a spring "fudge-it budget" were unsubstantiated. The Panel projects even higher income from BC Hydro than projected in the March 2001 budget, and finds BC's accounting procedures to be solid. The Panel also implicitly rejects the pre-election argument that tax cuts will increase revenues.