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BUDGET 97: REPORTS
Ministry of Finance and Corporate Relations
Province of British Columbia
Report B: FISCAL REVIEW AND OUTLOOK
Review of 1996/97
Revenue for the year was $465 million below budget due to slower-than-expected economic growth, and weaker-than-expected commodity prices. Lower-than-budgeted revenue from natural resources, various taxes, fines and other revenue sources were partially offset by higher-than-budgeted contributions from the federal government and Crown corporations.
Expenditure was $28 million above budget, as unexpected pressures in the Ministries of Human Resources, Attorney General and Health, and for the BC Benefits program were partially offset by the effect of in-year spending reductions and freezes. As a result, spending was below budget in thirteen of the sixteen government ministries.
The shortfall in revenue resulted in the consolidated revenue fund having an estimated deficit of $395 million in 1996/97, compared to a surplus originally forecast.
The government financed the deficit and net disbursements for financing and working capital transactions of $467 million, by reducing its cash balances and by increasing direct debt (see Table B1). Requirements for financing and working capital transactions were higher than expected mainly due to lower-than-expected collections of revenue accounts at the end of 1995/96, lower proceeds from the disposition of fines, and lower-than-expected cash reimbursements of expenditures incurred on behalf of Crown corporations. As a result, government direct debt increased $837 million in 1996/97.
Revenue totalled $20,207 million in 1996/97, up 2.1 per cent from the comparable figure for 1995/96, but down $465 million or 2.2 per cent from the 1996/97 budget estimate. This 2.2 per cent variance from budget is within the average variance experienced in British Columbia over the past 15 years (see Chart B1).
Forests revenue was $303 million below budget due to lower revenue from timber sales (down $167 million), the small business forest enterprise program (SBFEP) (down $60 million) and logging tax (down $76 million). Timber sales revenue declined due to lower-than-expected stumpage rates, which offset a modest increase in harvest volumes. Rising lumber prices during the year did not affect stumpage rates until the last half of the year, and only partially offset the effect of lower-than-expected stumpage rates during the first half of the year. Volumes harvested under the SBFEP were almost 25 per cent less than expected, due to weak market demand and lower chip prices. A sharp decline in pulp prices and forest sector profits that occurred in late 1995 and continued in 1996 resulted in lower logging tax revenue.
Social service tax revenue was $100 million below budget due to lower-than-expected consumer and investment spending. In 1996, retail sales grew by 1.4 per cent while machinery and equipment investment spending declined by 0.4 per cent, compared to the budget forecast of 4.3 per cent and 6.7 per cent growth, respectively.
Other revenue was $96 million below budget. Lower revenue from photo radar fines, motor vehicle licences and permits, sales of Crown land and other fees and licences was partially offset by higher revenue from Medical Services Plan premiums, maintenance of children receipts and investment earnings. [Table B2]
Corporate income tax revenue was $95 million below budget because of lower-than-expected federal instalment payments for the 1996 tax year due to a lower federal estimate of the national corporate income tax base and a slightly lower British Columbia share of the tax base.
Other tax revenue was $56 million below budget. Corporation capital tax revenue was $42 million below budget due to lower-than-expected instalments received for the current year and higher-than-expected refunds in respect of previous taxation years. Lower-than-expected property assessments resulted in a $13-million decline in property tax revenue. The jet fuel tax remission to Canadian Airlines International reduced fuel tax revenue by $11 million. These declines were partially offset by a $10-million increase in property transfer tax revenue due to a pickup in housing sales.
Minerals revenue was $31 million below budget due to weaker-than-expected copper and molybdenum prices and higher-than-expected refunds in respect of 1995/96.
Higher prices for oil and natural gas led to a $75-million increase in petroleum and natural gas revenue. This included a pickup in sales of Crown land drilling rights which were $61 million higher than budget.
Personal income tax revenue was $60 million above budget due to the impact of higher-than-expected assessments for the 1995 taxation year, partly offset by higher-than-expected BC Family Bonus entitlements for 1996/97, and a lower forecast of British Columbia personal income growth in 1996.
Contributions from the federal government were up $45 million from budget. The Canada health and social transfer (CHST) was $23 million below budget as more of the entitlement was received through tax point transfers. (CHST revenue is the amount of the provincial entitlement after deducting 13.5 points of personal income tax and one point of corporate income tax from the total entitlement). The decline in CHST revenue was more than offset by a $68-million increase in other federal payments, including a $27-million partial recovery of Canada Assistance Plan entitlements withheld by the federal government in 1995/96, a $22-million contribution in support of provincial immigration programs, and additional revenue due to the extension of the National Training Act and Vocational Rehabilitation of Disabled Persons agreements.
Contributions from government enterprises were $36 million above budget as higher revenue from British Columbia Hydro and Power Authority and British Columbia Lottery Corporation offset lower revenue from British Columbia Buildings Corporation, British Columbia Systems Corporation and other Crown corporations.
Expenditure in 1996/97 was $28 million above budget at $20,602 million. This was 2.3 per cent higher than in 1995/96. During the year, unexpected spending pressures were identified in the Ministries of Human Resources, Attorney General and Health and for the BC Benefits program. The government responded by introducing a series of specific measures, including spending reductions and spending freezes to immediately cut the size and cost of the government in 1996/97. As a result, spending is expected to be below budget in thirteen of the sixteen ministries at year end (see Table B3).
Ministry of Human Resources expenditure was $73 million above budget because of higher-than-budgeted income assistance spending. However, as a result of the introduction of the BC Benefits program, along with other initiatives to improve work incentives, the average income assistance caseload decreased by an estimated 9.2 per cent in 1996/97. Compared to 1995/96, income assistance expenditures fell by 11 per cent.
Spending by the Ministry of Attorney General was $66 million above budget due to increased expenditures for flood damage compensation, criminal injury compensation and higher utilization of corrections programs.
Ministry of Health expenditure was $60 million above budget mainly because of higher-than-budgeted spending for physicians' services, labour settlement costs for health care workers and higher-than-budgeted Pharmacare utilization.
Ministry of Forests expenditure was $37 million below budget as higher-than-expected spending on forest fire suppression was more than offset by spending reductions directed by Treasury Board.
Ministry for Children and Families expenditure was $36 million below budget because of administrative and management efficiencies that resulted from the amalgamation of services when this new ministry was established.
Ministry of Education, Skills and Training expenditure was $36 million below budget because of spending reductions directed by Treasury Board and slower-than-planned spending for skills development.
Ministry of Municipal Affairs and Housing was $21 million below budget because of slower-than-expected grant disbursements to local governments for infrastructure projects.
Ministry of Finance and Corporate Relations was $17 million below budget. The government-wide freeze on vehicle purchases reduced spending through the Purchasing Commission Working Capital special account, while other ministry programs were underspent because of spending reductions directed by Treasury Board.
The Public Service Employee Relations Commission was $40 million above budget, reflecting government-wide unallocated costs for the work-force adjustment strategy to reduce the size of government.
BC Benefits was $82 million above budget because of higher-than-expected take-up of the BC Family Bonus program.
Management of Public Funds and Debt was $45 million below budget mainly because of lower interest rates.
1997/98 Fiscal Plan
The budgetary transactions of the consolidated revenue fund are summarized in Table B1.
The consolidated revenue fund is projected to have a deficit of $185 million in 1997/98, less than one-half the size of the 1996/97 revised forecast.
Revenue for 1997/98 is estimated at $20.3 billion, an increase of 0.4 per cent from the 1996/97 revised forecast. The forecast is based on lower economic assumptions than the Ministry of Finance and Corporate Relations' economic forecast. The reason for introducing this caution is to provide greater certainty that total revenues will be on or above budget. This will help ensure that the government's fiscal targets are met (see the Revenue Estimates Based on Prudent Economic Assumptions topic box).
Expenditure will total $20.5 billion in 1997/98, a reduction of $103 million or 0.5 per cent from the 1996/97 budget estimate and $131 million lower than the 1996/97 revised forecast. This is the first time since the late 1950s that the provincial government's budgetary spending has declined in actual dollar level terms. Chart B2 shows that in real per capita terms spending will fall 4.1 per cent compared to the 1996/97 budget.
Program expenditure, which excludes spending on debt interest (management of public funds and debt), is estimated at $19.6 billion, a decrease of 0.4 per cent from the 1996/97 revised forecast. As a result, there will be a program surplus of $720 million in 1997/98 -- the largest program surplus since 1989/90. A program surplus means that revenue exceeds spending on government programs and that debt interest accounts for the deficit in 1997/98.
The government's financial requirements will total $530 million in 1997/98. This includes the deficit and net disbursements from financing and working capital transactions of $345 million. These requirements will be financed by increasing government direct debt by $530 million. Report C provides more information on the government's financing plan.
The Summary Financial Statements and Accounting Policy Changes topic box in this report provides information on the summary financial statements and accounting policy changes included in the 1997/98 estimates. The summary financial statements provide estimates of the combined financial results of the government and its Crown corporations and agencies. In 1997/98, the summary financial statements show a deficit of $886 million, compared to a revised forecast deficit of $748 million in 1996/97.
Revenue of the consolidated revenue fund for 1997/98 is estimated at $20,286 million, an increase of 0.4 per cent from the revised forecast for 1996/97. The 1997/98 forecast is based on prudent economic assumptions (see the Revenue Estimates Based on Prudent Economic Assumptions topic box).
The forecast includes the effects of budget measures that will increase revenue by $88 million in 1997/98 (see Report D for details). In addition, the forecast includes additional revenue from asset dispositions as well as higher revenue from Crown corporations resulting from various strategic initiatives.
Taxation revenue, the largest source of provincial government revenue, is expected to total $12,825 million in 1997/98, down 1.6 per cent from the 1996/97 revised forecast.
Personal income tax revenue is expected to increase only slightly. This reflects modest growth in personal incomes, the full-year effect of tax reductions introduced last year, including the BC Family Bonus and a one-point reduction in the personal income tax base rate effective July 1, 1996, and a further one-point reduction in the base rate effective July 1, 1997. In total, these measures will reduce revenue by $275 million in 1997/98.
Corporation income tax revenue will decrease by $332 million or 24.5 per cent. The lags in the corporate income tax system mean that the full effect of last year's large decline in profits will be felt in 1997/98. (In technical terms, the effect of a modest increase in corporate profits in 1997 will be offset by a large negative prior-year adjustment pertaining to the 1996 tax year as the province returns over-payments of corporation tax revenue to the federal government.) The full-year impact of the reduction in the small business tax rate on July 1, 1996 will also contribute to lower corporate tax revenue.
Social service tax revenue, estimated at $3,142 million, will increase 3.0 per cent, due to growth in retail sales and machinery and investment spending. Tobacco tax revenue will increase only slightly, as higher revenue from a rate increase announced in the 1997 budget is partly offset by a decline in consumption volumes. Fuel tax revenue will decline 5.9 per cent in 1997/98, mainly due to a transfer of an additional 1 cent per litre of clear fuel tax revenue to the BC Transportation Financing Authority, effective April 1, 1997.
Property tax revenue is expected to increase 2.6 per cent in 1997/98, due to increased assessments for new construction, higher assessed values, and the setting of non-residential rates (school and rural) at 1996 levels as detailed in Report D.
Property transfer tax revenue will increase 2.5 per cent as low mortgage rates continue to boost housing sales. Corporation capital tax revenue will increase 6.8 per cent due to increased business investment and administrative changes announced in the budget to standardize the application of the tax. Hotel room tax revenue will fall 19.5 per cent, in expectation that a portion of this revenue will be dedicated to a new tourism agency.
Forests revenue will decrease only slightly from last year. Despite a slightly lower forecast of average prices for spruce-pine-fir for 1997, average stumpage rates will be higher than in 1996/97 due to the effect of the five-month lag between market prices and adjustments to stumpage rates. The favourable effect of higher stumpage rates is expected to be offset by a decline in harvested volumes, due to a forecast slowdown in U.S. and Japanese housing starts. Weak forest industry profits in 1996 will result in a decline in logging tax revenue in 1997/98. Revenue does not include $495 million of stumpage revenue that will be received by Forest Renewal BC during 1997/98.
Revenue from petroleum, natural gas and minerals will decrease by $80 million. An outlook for lower natural gas prices will result in lower natural gas royalties and lower sales of Crown land drilling rights. Water rental revenue, which is based on the previous year's water use, will increase 8.5 per cent due to larger amounts of electricity generated in 1996/97.
Other revenue, at $2,204 million, is expected to increase 14.7 per cent. This reflects higher demand for government services, a number of adjustments to fee and licence rates, increased sales of Crown land, increased fines revenue due to the full-year effect of the speed monitoring program introduced last year, and expected proceeds from asset dispositions.
The government expects to realize approximately $170 million from the disposition of government assets in 1997/98. For example, as part of its restructuring initiative to become more cost efficient, the government is evaluating alternative ways of delivering some information technology services it currently provides. As well, the government is conducting a comprehensive internal review to identify other surplus assets that could be sold.
Contributions from government enterprises are expected to increase 22 per cent in 1997/98. British Columbia Liquor Distribution Branch profits are expected to increase 1.4 per cent, reflecting growth in sales volumes. Although electricity rates remain frozen, dividends from British Columbia Hydro and Power Authority will increase $89 million from 1996/97, reflecting increased profitability and the introduction of further efficiency measures. British Columbia Lottery Corporation profits are expected to increase 21.4 per cent reflecting higher ticket sales and expansions to public gaming activity. Other Crown corporation dividends will increase $99 million mainly due to additional profits resulting from efficiencies and sales of properties and other assets through the British Columbia Railway Company and the British Columbia Buildings Corporation.
Contributions from the federal government will be 9 per cent lower than in 1996/97. Revenue from the Canada Health and Social Transfer will be $195 million lower than in 1996/97, due to the continuation of federal transfer cuts and an increase in the amount of the entitlement being received through tax point transfers. Other federal contributions will increase 11.2 per cent. This includes $80 million to be received from the federal government to help offset costs of provincial immigration programs, and infrastructure projects on the Lower Mainland in preparation for the Asia-Pacific Summit in November 1997.
Expenditure of the consolidated revenue fund is estimated at $20,471 million in 1997/98. This is $103 million or 0.5 per cent lower than the 1996/97 budget estimate and $131 million lower than the 1996/97 revised forecast (see Table B3).
The budget of the Ministry of Health will increase to $7,315 million, up $302 million or 4.3 per cent from last year's budget. Significant increases include $133 million for acute and continuing care programs, $84 million for physician services and $34 million for Pharmacare. The budget for contributions to British Columbia Transit will increase $10 million.
The Ministry of Education, Skills and Training's budget of $5,783 million provides an increase of $36 million or 0.6 per cent over the 1996/97 budget. Funding for K-12 Education Programs will increase by $63 million or 1.6 per cent from last year's budget. Operating contributions to universities, colleges and institutes will be maintained at the 1996/97 level of $1,072 million, while student financial assistance will increase $5 million or 4.6 per cent. Skills development programs are $15 million lower than last year's budget because of reduced demand resulting from the declining income assistance caseload of employable people.
Ministry of Human Resources expenditure is estimated at $1,698 million, down 0.2 per cent from last year. The spending budget provides for the elimination of the three-month residency requirement and the introduction of measures designed to ensure that income assistance is provided to only those most in need.
Ministry of Attorney General expenditure is estimated at $896 million, up $51 million or 6.0 per cent. Increases reflect higher utilization and include adult corrections, up $16 million, criminal injury compensation, up $13 million, the Emergency Program Act, up $10 million and the Crown Proceeding Act, up $9 million.
Budgeted spending for the Ministry for Children and Families of $1,361 million will be $36 million or 2.6 per cent lower than 1996/97 because of the full-year effect of administrative and management efficiencies that resulted from the amalgamation of services in this new ministry.
Ministry of Forests expenditure will decrease $152 million to $503 million mainly due to reduced silviculture activities, restructuring of field operations and headquarters downsizing.
Ministry of Transportation and Highways expenditure will decrease $120 million to $508 million due to reduced direct ministry funding of highway rehabilitation, the completion of the transfer of responsibility for the Motor Vehicle Branch to the Insurance Corporation of British Columbia, and general ministry-wide savings initiatives.
Ministry of Environment, Lands and Parks expenditure of $204 million is $29 million lower than the 1996/97 budget because of downsizing and rationalization of the headquarters policy function, amalgamation and reduction in the size of regional offices, and general ministry-wide efficiencies.
Ministry of Municipal Affairs and Housing expenditure of $359 million will decrease $81 million mainly because of a reduced and restructured unconditional grant program for local governments.
Ministry of Small Business, Tourism and Culture expenditure of $92 million will decrease $50 million reflecting the expectation that responsibility for tourism development, marketing and other related activities will be transferred to a new tourism agency. Other spending reductions include lower expenditures for sport, culture, heritage and community grants and eliminating or downsizing other ministry functions.
BC Benefits expenditure of $300 million will increase $144 million from the 1996/97 budget, reflecting the annualization of the BC Family Bonus program which started July 1, 1996, and higher utilization that occurred in 1996/97.
Management of Public Funds and Debt will decrease $96 million mainly because of lower interest rates.
The government has extended its accounting policy of capitalizing capital assets to certain assets held by the consolidated revenue fund. The effect of this change results in a reduction of consolidated revenue fund expenditures of $27 million in 1997/98. Further information is provided in the Summary Financial Statements and Accounting Policy Changes topic box, and in Schedule F of the 1997/98 Estimates.
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