This electronic version is for informational purposes only.
The printed version remains the official version.
FISCAL REVIEW AND OUTLOOK
Review of 1998/99
Revenue for the year is estimated to be $217 million below budget, $8 million higher than the comparable figure for 1997/98. Lower-than-budgeted revenue from natural resources, Crown corporation contributions, asset dispositions, taxation and other sources was partially offset by higher-than-budgeted revenue from federal transfers.
Expenditure is estimated to be $232 million above budget and 2.0 per cent higher than comparable spending in 1997/98. This included $115 million in unanticipated forest fire costs, plus higher-than-budgeted spending of $237 million in the Ministries of Health, Children and Families and Attorney General, and for BC Benefits, partially offset by budget management measures to reduce spending in other areas. As a result, spending was on or below budget in fifteen of the nineteen ministries.
The lower-than-expected revenue and higher-than-expected expenditure resulted in the consolidated revenue fund having an estimated deficit of $544 million in 1998/99, $449 million higher than the planned level of $95 million and $392 million higher than in 1997/98.
The government's financial requirements for 1998/99 included the deficit, net disbursements for financing and working capital transactions of $544 million, offset by a $373-million decrease in cash balances (see Table B1). Requirements for financing and working capital transactions were higher than planned mainly due to lower cash instalments of personal income tax received from the federal government, higher foreign exchange debt adjustments, and delayed revenue collections partly reflecting relief measures under the Forest Action Plan. As a result, government direct debt increased $715 million for the year, $440 million higher than budgeted.
Revenue totalled $20,224 million in 1998/99, $217 million below budget and up $8 million from the comparable figure in 1997/98. Lower-than-budgeted revenue from natural resources, Crown corporation contributions, asset dispositions, taxation and other sources was partially offset by higher-than-budgeted revenue from federal transfers (see Table B2).
Taxation revenue was $33 million below budget and down 0.2 per cent from 1997/98. Personal income tax revenue was $61 million above budget as higher-than-expected final assessments for the 1997 tax year were partially offset by the effect of lower-than-expected growth in personal incomes. Revenue was 2.4 per cent higher than in 1997/98, reflecting growth in personal incomes partially offset by the effect of federal and provincial tax reduction measures introduced in 1998/99.
Corporation income tax revenue was $125 million above budget due to higher-than-expected final assessments for the 1997 tax year. However, revenue was 3.3 per cent lower than in 1997/98 due to British Columbia's lower share of the national tax base and provincial tax reduction measures introduced in 1998/99.
Social service tax revenue was down $135 million from budget and 2.9 per cent lower than in 1997/98, mainly due to weak retail sales activity. Retail sales declined 1.5 per cent in 1998, compared to the budget forecast of a 2.0 per cent increase.
Revenue from property, fuel and other tax sources was $84 million below budget. Property transfer tax revenue was $95 million below budget and 31 per cent lower than in 1997/98 due to the weak housing market. Revenue from fuel and tobacco tax was $15 million below budget due to lower consumption volumes. Corporation capital tax revenue was up $30 million from budget due to higher corporate profits growth in 1997 and a larger assessment base.
Natural resource revenue was $137 million below budget and 17 per cent lower than in 1997/98. Petroleum, natural gas and minerals revenue was $19 million lower than budget mainly due to reduced sales of Crown land drilling rights, partly offset by the effect on royalties of higher natural gas prices.
Forests revenue was $146 million below budget and 21 per cent lower than in 1997/98. Lower-than-budgeted revenue from timber sales and the small business forest enterprise program (down $153 million), logging tax (down $12 million) and other sources was partly offset by a higher-than-budgeted payment from the federal government for refunds of 1997/98 softwood lumber export fees (up $21 million). The expected positive effects of the stumpage rate reductions on June 1, 1998 were more than offset by continued weakness in commodity markets. Compared to 1997/98, overall harvest volumes fell slightly, by 0.6 per cent in 1998/99. Coastal harvest volumes fell 13 per cent, while Interior harvest volumes rose 3.9 per cent.
Revenue from water and other resources was $26 million above budget mainly due to higher revenue from water rentals and additional sales of electricity received through the Columbia River Treaty.
Other revenue was down $217 million from budget, but up 2.9 per cent from the previous year. Delays in the finalization of a number of initiatives caused revenue from asset dispositions to be $120 million less than planned. The government will be continuing these asset dispositions, which include the sale of BC Online, in addition to new projects in 1999/00. Revenue from fees and licences was $67 million below budget mainly due to lower revenue from public gaming licences, real estate earnings, land titles and other fees. Other miscellaneous revenue was $27 million below budget due to lower revenue from fines, and year-end recoveries from other sources.
Contributions from government enterprises were $194 million below budget but up 5.9 per cent from the previous year. The dividend from BC Hydro was $53 million below budget due to lower electricity demand and increased energy costs. Net income of the Liquor Distribution Branch was $21 million below budget due to lower sales volumes. British Columbia Lottery Corporation profits were $19 million below budget due to lower levels of expanded gaming activities. Contributions from other Crown corporations, which include British Columbia Railway Company and British Columbia Buildings Corporation, were $101 million less than planned. The government expects to receive these dividends in 1999/00.
Contributions from the federal government were $234 million higher than budget. The Canada health and social transfer (CHST) was $228 million above budget mainly due to $170 million of additional cash entitlements resulting from revisions to population estimates by Statistics Canada. The province also received $58 million of additional contributions as a result the federal government's commitment to provide a $12.5-billion cash floor for provinces and territories. Other federal contributions were $6 million above budget due to additional cost-sharing payments received in respect of prior years.
A revenue allowance of $130 million was included in the 1998/99 budget to provide a cushion corresponding to economic growth of 0.3 per cent, 0.6 percentage points lower than the 1998 budget economic forecast. The shortfall of $347 million from individual revenue sources reflected, in part, weaker economic performance, with real GDP estimated to have declined 0.5 per cent in 1998. The revenue allowance reduced this shortfall, resulting in total revenue being $217 million below budget.
Expenditure of $20,768 million was $232 million above budget and 2.0 per cent higher than comparable expenditure for 1997/98. This included $115 million in unanticipated forest fire fighting costs, plus higher-than-budgeted spending of $237 million in the Ministries of Health, Children and Families and Attorney General, and for BC Benefits. These pressures were partially offset by budget management measures to reduce spending in other areas. As a result, spending was on or below budget in fifteen of the nineteen ministries.
Ministry of Health expenditure of $7,387 million was $145 million above budget. This was primarily due to increased spending to reduce waitlists, and for kidney dialysis and cancer drugs, on-call arrangements for doctors in northern British Columbia, higher-than-expected Pharmacare utilization, additional spending through the medical and health care services special account, and start-up costs for the new national blood program.
Ministry of Forests expenditure was $109 million above budget because of higher-than-expected spending on forest fire suppression. 1998/99 was one of the worst fire seasons on record with fire fighting costs of about $194 million, up $115 million from budget and $132 million higher than in 1997/98. The increase was partially offset by spending reductions in other areas.
Ministry for Children and Families expenditure of $1,467 million was $45 million above budget due to higher-than-planned spending for residential and support programs for children, youth and disabled adults.
Spending by the Ministry of Attorney General was $22 million above budget mainly due to increased payments for flood and forest fire related damage compensation, and for claims under the Crown Proceeding Act.
Ministry of Advanced Education, Training and Technology expenditure of $1,684 million was $13 million below budget due to reduced spending for skills development programs and student financial assistance.
Ministry of Education expenditure of $4,263 million was on budget. During the year, savings from lower-than-expected public school enrolment were used to fund reductions in K-3 class size.
Ministry of Environment, Lands and Parks spending was $8 million below budget due to the assumption of land tenure administration responsibilities by the British Columbia Assets and Land Corporation.
Ministry of Human Resources expenditure of $1,555 million was on budget. In 1998/99, the income assistance caseload declined an estimated 6.6 per cent compared to an 8.4-per-cent decline in 1997/98. The decline reflects the success of caseload management initiatives and early intervention programs.
Spending by the Ministry of Municipal Affairs was $15 million below budget because of lower-than-expected infrastructure grant disbursements to local governments.
Ministry of Transportation and Highways expenditure was $6 million below budget because of lower spending for highway rehabilitation.
In total, other ministries were $18 million below budget. These included Aboriginal Affairs (down $2.3 million), Agriculture and Food (down $1.5 million), Employment and Investment (down $4.4 million), Energy and Mines (down $4.5 million), Finance and Corporate Relations (down $2.9 million), Fisheries (on budget), Labour (on budget), Small Business, Tourism and Culture (down $2.4 million), and Women's Equality (down $0.2 million).
Management of Public Funds and Debt expenditure of $876 million was $4 million below budget mainly due to higher-than-expected sinking fund investment earnings which are deducted from interest expense on government direct operating debt.
The Contingencies (All Ministries) and New Programs vote provides for unexpected expenditure pressures that develop during the year. Spending through this vote is estimated at $74 million in 1998/99, including $10 million for one-time costs relating to aboriginal treaties and negotiations, $19 million for court related costs, $15 million for health care and up to $20 million for potentially higher-than-expected income assistance expenditures.
Spending for BC Benefits was $25 million above budget mainly because of higher-than-expected utilization.
The annual amortization of changes in unfunded pension liabilities was $52 million larger than expected due to an unanticipated reduction in the unfunded pension liability of the Municipal Pension Plan. The latest actuarial valuation of the provincial share shows a liability of $208 million, down $549 million from the $757-million liability previously estimated. In accordance with the government's accounting policy, this reduction is amortized over the expected remaining service life of the related employee group. A similar annual adjustment will be recorded in future years until the full amount of the reduction is amortized.
1999/00 Fiscal Plan
The budgetary transactions of the consolidated revenue fund are summarized in Table B1.
The effects of slower economic growth, increased service demand and a $230-million revenue allowance will result in the consolidated revenue fund having a deficit of $890 million in 1999/00, an increase of $346 million from the 1998/99 revised forecast.
Revenue for 1999/00 is estimated at $20.2 billion, a decrease of 0.3 per cent from the 1998/99 revised forecast. The forecast includes a revenue allowance of $230 million to provide a cushion against lower growth than the Ministry of Finance and Corporate Relations' economic forecast. Consistent with the approach used in the 1998/99 budget, this allowance provides greater likelihood that total revenues will be on or above budget (see Prudent Economic Assumption for the Revenue Forecast topic box).
Expenditure will total $21.0 billion in 1999/00, an increase of $509 million or 2.5 per cent from the 1998/99 budget estimate and $277 million higher than the 1998/99 revised forecast.
Chart B1 shows that in real per capita terms (total expenditure divided by the British Columbia population and adjusted for inflation), government spending has declined through the 1990s. By 1999/00, real per capita spending is projected to have declined 9.6 per cent since 1991/92 and down marginally from the 1998/99 revised forecast. The chart reflects the various efficiencies and program reductions that government has implemented despite demand pressures.
Program expenditure, which excludes spending on direct operating debt interest (management of public funds and debt), is estimated at $20.1 billion, an increase of 1.1 per cent from the 1998/99 revised forecast. As a result, there will be a program surplus of $50 million in 1999/00.
The government's financial requirements will total $1,432 million in 1999/00. This includes the deficit of $890 million and net disbursements for financing and working capital transactions of $542 million. These requirements will be financed by increasing government direct operating debt. More information on the government's financing plan is provided later in this report.
The summary financial statements provide estimates of the combined financial results of the government and its Crown corporations and agencies. In 1999/00, the summary financial statements show a deficit of $1,529 million, compared to the revised forecast deficit of $1,158 million in 1998/99. Most of the projected increase is due to the higher deficit of the consolidated revenue fund in 1999/00 (see the Summary Financial Statement topic box).
Revenue of the consolidated revenue fund is estimated at $20,155 million in 1999/00, a decline of 0.3 per cent from the revised forecast for 1998/99.
The forecast incorporates the effects of tax reduction measures announced in last year's budget, plus new provincial tax measures which reduce revenue by over $50 million in 1999/00. The forecast also incorporates additional transfers of fuel and sales taxes to Crown corporations and other public bodies, which reduce revenue by $209 million in 1999/00. (see Report D for details of 1999/00 provincial measures)
Taxation revenue, the largest source of provincial government revenue, is expected to total $12,546 million in 1999/00, down 4.0 per cent from the 1998/99 revised forecast.
Personal income tax revenue is estimated at $5,374 million, a decline 2.2 per cent in 1999/00. The effect of expected personal income growth of 2.6 per cent is offset by 1999 federal and provincial budget measures, which reduce provincial income tax revenue by $75 million and $9 million respectively.
Corporation income tax revenue will decline 23 per cent in 1999/00. Lags in the corporation income tax system, a lower federal estimate of the national tax base, and an expected 15-per-cent decline in provincial corporate profits in 1998, mean that the province will receive lower instalment payments and will also have to return overpayments of corporation income tax revenue to the federal government. The forecast incorporates a reduction in the small business income tax rate to 5.5 per cent from 8.5 per cent effective July 1, 1999, and incentives for research and development to be announced during the fiscal year.
Social service tax revenue, estimated at $3,190 million, will increase 1.3 per cent, reflecting expected growth in retail sales and machinery and equipment purchases. The forecast also reflects a transfer of $10 million to the new Greater Vancouver Transportation Authority, relating to sales tax for parking lot usage within Greater Vancouver.
Fuel tax revenue will decline 31 per cent to $436 million in 1999/00. This reflects additional transfers, totalling $199 million, to help finance operations and capital spending of the BC Transportation Financing Authority, the British Columbia Ferry Corporation and the Greater Vancouver Transportation Authority. Further details are shown in Report D.
Property tax revenue will increase 1.4 per cent in 1999/00, reflecting expected growth in the residential and non-residential tax base. Property transfer tax revenue will increase only slightly, reflecting continued weakness in housing sales. Corporation capital tax revenue will decline 4.8 per cent due to the effect of 1998/99 budget measures that will increase the exemption threshold to $3.5 million of net paid-up capital effective January 1, 2000, and the four-year tax holiday for eligible new expenditures.
Revenue from natural resources is expected to increase 3.0 per cent in 1999/00, due to higher revenue from petroleum and natural gas and increased revenue from additional sales of electricity under the Columbia River Treaty.
Revenue from petroleum, natural gas and minerals will increase 2.2 per cent in 1999/00, reflecting continued strength in the price of natural gas and improved sales of Crown land drilling rights. Minerals revenue will decline $20 million due to an outlook for weak commodity prices and markets.
In 1999/00, forests revenue is projected at $1,073 million, $4 million lower than in 1998/99. Harvest volumes on Crown land are expected to be unchanged in 1999/00. The bellwether spruce-pine-fir (2x4) price is expected to increase to $U.S. 295 per thousand board feet in 1999, reflecting stronger average prices in the first quarter of 1999. However, prices for other forest products such as hemlock and pulp are forecast to decline. Forests revenue excludes $114 million of dedicated stumpage revenue that will be collected for Forest Renewal BC during 1999/00.
Historically, forest revenues have been one of the most variable revenue sources, exposed to a variety of hard-to-predict factors including volatile commodity markets and weather. For 1999/00, major factors that may affect the forecast are the strength of the U.S. housing sector, the market response to constraints of the Canada-U.S. Softwood Lumber Agreement, industry response to the Forest Action Plan, and the outlook for pulp prices. Further details on forecast assumptions and sensitivities are shown in Table B4.
Water and other resource revenue will increase $48 million or 14 per cent in 1999/00, as increased revenue from additional electricity sales under the Columbia River Treaty is partly offset by lower water rental charges due to lower water use by BC Hydro.
Other revenue, at $1,928 million, will increase $76 million or 4.1 per cent in 1999/00. This reflects the normal increase in demand for government services, a number of minor adjustments to fee and licence rates, increased real estate earnings, increased fines revenue from continued speed monitoring enforcement and additional proceeds from asset dispositions.
The government expects to finalize a number of asset disposition initiatives that were not completed in 1998/99. These include the disposition of BC Online and other initiatives. In addition, a number of new initiatives will be undertaken to dispose of surplus assets as part of the government's ongoing review and evaluation of its assets and service delivery programs. In total, the government expects to realize $84 million of proceeds from the disposition of government assets in 1999/00.
Contributions from government enterprises are expected to increase $324 million or 24 per cent in 1999/00. This includes $101 million of dividends that were not received in 1998/99, plus additional dividends resulting from profits and planned asset dispositions in 1999/00.
British Columbia Lottery Corporation profits are expected to increase 16 per cent due to increased gaming activity. The increase reflects the full-year effect of facilities and operating changes introduced part way through 1998/99, as well as the addition of a small number of destination casinos already accepted by local communities. The forecast does not assume expansion due to changes in policy or legislation. The British Columbia Railway Company is expected to contribute $31 million in 1999/00.
Over the last two years, the government has undertaken a review of properties, assets and business operations in ministries and Crown corporations, to determine whether certain assets or operations would more appropriately be owned or operated by the private sector. This is consistent with the report of the BC Business Summit. Within government, recent strategies have resulted in increased sales of Crown lands, the sale of the government vehicle fleet and the pending disposition of BC Online. Crown corporation strategies have resulted in the wind-up of British Columbia Systems Corporation and the sale of the Westel operations of British Columbia Railway Company.
The government its continuing its review of assets and operations, and in 1999/00 focus will be placed on properties held and administered by the British Columbia Buildings Corporation. The 1999/00 dividend target of $246 million consists of unremitted dividends of $71 million in respect of 1998/99; $25 million from expected operating profits in 1999/00; and $150 million from proceeds resulting from sales of certain land and asset holdings.
Contributions from the federal government are projected to increase 11 per cent to $2,352 million. Revenue from the Canada health and social transfer will increase $260 million, reflecting the effect of one-time contributions for population adjustments in 1998/99, and additional contributions in 1999/00 due to federal budget measures.
As announced in the 1999 federal budget, additional federal funding will be available to provinces in support of health services. British Columbia's total share of the $3.5 billion federal supplement is estimated at $471 million, and is available over three years. The revenue forecast assumes that $350 million of this supplement will be used in support of provincial health care in 1999/00, while the remainder will be available in subsequent years. Other federal contributions will decline $28 million mainly due to the termination of federal funding under the National Training Act and the Asia-Pacific Initiative agreements.
The consolidated revenue fund revenue estimates exclude $731 million of revenue collected on behalf of, and transferred to, Crown corporations, agencies, and other entities. Details on these transfers are shown in Table H5.
Consistent with the approach used in 1998/99, the 1999/00 revenue forecast includes a revenue allowance of $230 million to provide a cushion against lower growth than the Ministry of Finance and Corporate Relations' economic forecast. The $230 million allowance is generally equivalent to a change of 1.1 per cent in real GDP. The rule-of-thumb that revenues rise or fall 1 per cent with an equivalent change in economic activity is not a precise rule. For example, it implicitly assumes that price levels remain constant and that nominal GDP, which is a key revenue determinant, will also rise or fall 1 per cent. In practice, various combinations of economic conditions can result in a 1 per cent change in revenue. (See Prudent Economic Assumption for the Revenue Forecast topic box for further information.)
Revenue Assumptions and Sensitivities
Table B4 summarizes the key economic assumptions for the main revenue sources used in preparing the 1999/00 revenue forecast. In addition, the table provides estimates of the sensitivity of revenues to changes in individual assumptions. By their nature, these sensitivities provide an order of magnitude only, as other factors can affect revenue in addition to the economic variables listed. Other assumptions, which include estimates of the effects of government policy initiatives, have been described in the text above and in Report A.
Typically, most revenue sources may vary from original forecasts due to a large combination of factors. These include changes in economic conditions, policy changes implemented mid-year, and other unpredictable events such as changing weather patterns, foreign trade restrictions (e.g. Canada/U.S. Softwood Lumber Agreement), and labour disruptions. However, some of these changes may offset each other. For example, the extra $170 million of CHST revenue received in 1998/99 due to population revisions helped offset some of the loss in revenue resulting from the weaker-than-expected economic performance.
Expenditure of the consolidated revenue fund is estimated at $21,045 million in 1999/00. This is $509 million or 2.5 per cent higher than the 1998/99 budget estimate and $277 million or 1.3 per cent higher than the 1998/99 revised forecast (see Table B3).
The main assumptions supporting the 1999/00 expenditure estimates are summarized in Table B5, together with a description of the major risks.
The Ministry of Health budget will increase to $7,720 million, up $478 million or 6.6 per cent from last year's budget. The budget provides a significant increase for acute and continuing care programs to address waitlists, to provide more long-term care beds and to hire additional nurses. The Medical Services Plan will increase $58 million for increased utilization of supplementary benefit services, decisions of the Medical Services Commission on contributions to the physician's reserve account, and an increase for physicians to reflect population growth and the aging of the population. Pharmacare will increase $64 million reflecting increased utilization and drug costs.
The Ministry of Education's budget of $4,349 million provides an increase of $86 million or 2.0 per cent over the 1998/99 budget. Public school operating contributions will increase $43 million or 1.2 per cent from last year's budget. The increase provides for inflation and enrolment, as well as for the hiring of up to 300 additional teachers, and for reducing class sizes for K-3. Other increases include $2.5 million for independent schools and $46 million for capital and debt financing.
Ministry of Advanced Education, Training and Technology spending will total $1,755 million, an increase of $59 million or 3.5 per cent. Program funding for post-secondary education will increase $55 million or 3.6 per cent. This includes a $16-million or 1.5-per-cent increase for educational institutions and organizations to support 2,900 additional student spaces at post-secondary institutions. Other increases include student financial assistance, up $8 million; capital and debt financing, up $29 million; and $12 million of new funding for community initiatives through the British Columbia 2000 program. Skills development programs will spend $6 million less due to lower-than-anticipated demand in 1998/99.
Ministry of Human Resources expenditure of $1,554 million is slightly lower than last year's budget. The income assistance caseload is projected to decline 4.5 per cent, compared to the 6.6-per-cent decline in 1998/99. The declining caseload trend reflects the success of programs to encourage transition from income assistance to work.
Spending for the Ministry for Children and Families of $1,482 million will be $60 million or 4.2 per cent higher than last year's budget. Services for families and children will increase $12 million and community living services for adults will increase $23 million. These increases help respond to the higher-than-expected demand for services experienced by the ministry in 1998/99.
Spending by the Ministry of Attorney General will increase $24 million to $918 million. Budget increases include criminal justice, up $9 million; superior and provincial courts, up $6 million; legal services, up $7 million; and corrections programs, up $6 million. Spending for policing services will decrease $7 million because a larger share of road safety costs will be paid by the Insurance Corporation of British Columbia.
The Ministry of Agriculture and Food will spend $6 million less in 1999/00, due to the end of one-time funding for the sterile insect release program and the loan guarantee program for the 1997 crop failure. A reduction in the provincial contribution to the Agriculture Renewal Initiative will be offset by increased contributions from the federal government.
Ministry of Environment, Lands and Parks expenditure will increase $7 million. BC Parks programs will develop and provide 1,000 new campsites and the Environment Youth Team program will assume some of the responsibilities that were previously funded by Forest Renewal BC.
Contributions to British Columbia Transit, through the Ministry of Finance and Corporate Relations, show a decrease of $125 million from last year. This reflects a transfer of lower mainland transit responsibilities from British Columbia Transit to the Greater Vancouver Transportation Authority (GVTA). Under the Greater Vancouver Transportation Authority Act introduced last year, the GVTA will plan, manage and operate a regional transportation system to support Greater Vancouver's growth strategy, air quality objectives and economic development. Funding for the GVTA is provided by increased provincial transfers of revenue from fuel and sales taxes, increased access to the local property tax base, and other own-source fees and charges.
The Ministry of Forests budget will increase $8 million, reflecting increased expenditures for forest resources management and the assumption of responsibilities previously funded by Forest Renewal BC. The Small Business Forest Enterprise program will provide the same level of forestry investment in 1999/00 as in 1998/99.
Ministry of Municipal Affairs expenditure of $142 million is $99 million or 41 per cent lower than last year. Programs providing grants to local governments have been restructured and reduced by $40 million. New funding of $13 million has been provided for traffic fine revenue sharing with municipalities. The budget also reflects reduced requirements for disbursements on conditional infrastructure commitments made to local governments (down $37 million), and the completion of the 1994 Canada/British Columbia Infrastructure Works Agreement (down $21 million).
Ministry of Transportation and Highways spending will decrease $10 million to $463 million, due to lower highway operations and maintenance expenditures. Spending for highway rehabilitation and construction, including amounts recovered from the BC Transportation Financing Authority, will increase 23 per cent to $476 million in 1999/00.
In total, other ministry budgets will decrease $6 million. These include Aboriginal Affairs (up $1.4 million), Employment and Investment (down $4.4 million), Energy and Mines (down $1.4 million), Fisheries (down $0.6 million), Labour (up $0.5 million), Small Business, Tourism and Culture (down $2.2 million) and Women's Equality (up $0.5 million).
BC Benefits expenditure of $222 million will be $23 million lower in 1999/00, due to expected program changes to the federal National Child Benefit System. These savings will be reinvested in programs for children and families.
Management of Public Funds and Debt expenditure of $940 million will increase $60 million mainly due to an increase in direct operating debt outstanding.
The provincial government and its Crown corporations and agencies borrow funds to finance operations and capital projects. Borrowing for operations is required when revenues fall short of expenditures and to meet other cash requirements such as loans and investments. Borrowing for capital projects finances the building of schools, hospitals, roads and other infrastructure. These investments provide essential services to benefit current and future generations of British Columbians.
The province's debt is reported using two basic classifications taxpayer-supported debt and self-supporting debt. Taxpayer-supported debt includes the direct debt of government and the debt of Crown corporations and agencies that require an operating or debt service subsidy from the provincial government. Self-supporting debt includes the debt of commercial Crown corporations and agencies, which fully fund their operations and debt from revenue generated through the sale of services, and debt of the warehouse borrowing program. The 1998/99 Debt Summary topic box provides additional information on provincial debt classifications.
Taxpayer-supported debt is a measure often used by investors and credit rating agencies when analyzing a province's investment quality. The ratio of a province's taxpayer-supported debt relative to its gross domestic product (GDP) highlights the ability of a province to manage its debt load. British Columbia's taxpayer-supported debt burden is one of the lowest in Canada, and this translates into a strong credit rating and lower debt servicing costs. Chart B2 provides a comparison of provincial taxpayer-supported debt-to-GDP ratios prepared by the Toronto Dominion Bank.
More comprehensive information on the debt of government and its Crown corporations and agencies is provided in the annual Debt Statistics Report. This document, which is issued subsequent to publication of the Public Accounts, provides a variety of information to help the reader understand the province's debt position.
Almost all Crown corporation and agency borrowing is done through the fiscal agency borrowing program. Under this program, the provincial government borrows directly in financial markets and relends the funds to Crown corporations and agencies. Borrowing and financing costs remain the responsibility of the Crown corporation or agency. This fiscal agency program provides lower-cost financing to Crown corporations due to the province's strong credit rating and its ability to borrow at lower interest rates.
Sources of Funds
Funding has come from a variety of sources including: public financial markets in Canada, the United States, Europe and Asia; the Canada Pension Plan Investment Fund; private institutional lenders; and provincial trusteed funds. Chart B3 shows the 10-year shift in the source of funds from private placements, such as the provincial trusteed funds and Canada Pension Plan, towards public markets, particularly in Canada and Europe (including BC Savings Bonds and issues under the Canadian and Euro medium-term note (MTN) programs).
Diversification of borrowing sources is a key factor in lowering financing costs and maintaining investor demand for British Columbia bonds and notes. A broad investor base is important given increased competition for funding.
Administrative and Reporting Changes
Several administrative and reporting changes affect the way in which provincial debt is reported.
Review of 1998/99
Total provincial net debt is forecast to be $32.0 billion at March 31, 1999, an increase of $1.8 billion from the previous year. The increase was $601 million higher than planned mainly due to the higher-than-expected deficit of the consolidated revenue fund, accelerated capital expenditures for projects including rapid transit in Greater Vancouver, increased pre-borrowing activities, and the need to refinance some of BC Hydro's foreign currency debt. These increases were partially offset by the assumption of debt by the MFA (outlined above).
Taxpayer-supported debt increased $1.0 billion during 1998/99. This consisted of a $715 million increase in government direct debt for operating purposes (to finance the deficit and other working capital financial requirements), and a $326 million net increase in other taxpayer-supported debt which included capital spending for education, health, highways, ferries and transit operations.
Self-supporting debt increased $805 million during 1998/99, including a $439 million increase in warehouse program debt and a $372 million increase in commercial Crown corporation debt.
Chart B4 shows the forecast change in total provincial net debt for 1998/99.
The province raised about 37 per cent of its 1998/99 financial requirements from international sources including issuance in the Euro MTN, US dollar, global, Deutsche mark, Swiss franc, and Japanese capital markets (see Chart B5). International financing generated interest cost savings to the province, compared to the domestic market, of $0.5 million annually. The domestic market also proved to be a cost-effective funding source as it responded well to the province's public bond, medium-term note and BC Savings Bond programs.
In 1998/99, the province took advantage of declining interest rates over the course of the year to decrease the floating rate debt exposure of the government operating and capital financing debt portfolios to about 35 per cent from 40 per cent.
Table B5 outlines the expected financing activities in 1999/00 for the government and its Crown corporations and agencies in support of operating requirements and capital projects. The 1999/00 Capital Plan topic box in Report C provides more information on the government's strategy for infrastructure investments.
In 1999/00, new financing for the provincial government and its Crown corporations and agencies is expected to total $6.5 billion, including $3.3 billion to finance net maturities and $517 million for sinking fund contributions.
Provincial net debt is estimated to total $34.7 billion at March 31, 2000, an increase of $2.7 billion from March 31, 1999, while taxpayer-supported net debt will total $26.2 billion, an increase of $3.2 billion.
Self-supporting debt is expected to decrease $471 million to total $8.5 billion at March 31, 2000. Most of this decrease is related to the drawdown of funds previously borrowed under the warehouse program.
The 1999/00 financing requirements will be met through new borrowing in the domestic and international markets. With an expectation that interest rates on long-term debt will rise modestly from the low current levels, the government's strategy in 1999/00 will be to increase the duration or average term of its portfolio by locking-in these favourable interest rates.
Other Debt Management Initiatives
Government policy requires that sinking funds be established to provide for repayment of debt issues with terms longer than five years. This means that the government must borrow funds to make regular payments into the sinking funds. The economic merit of increasing borrowing for this purpose is under review in consultation with rating agencies. The review may lead to discontinuing sinking fund contributions on existing and new government debt.
|Copyright © 1999: Queens Printer, Victoria, British Columbia, Canada|