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VICTORIA, British Columbia (Reuters) - British Columbia introduced a "status quo" C$41.9 billion ($42.3 billion) budget on Tuesday designed to give financial wiggle room to the Canadian province's next premier.
But the package could soon run into trouble if voters overturn a controversial tax deal with the federal government.
The budget projects a C$925 million deficit for the 2011-2012 fiscal year that begins in April, with spending up about 2 percent and total revenue expected to increase 3.4 percent as the province's resource-based economy makes a slow, steady recovery.
The 2010-2011 fiscal year is expected to end with a C$1.26 billion deficit, down from the C$1.7 billion projected when that budget was introduced last March.
The new budget is being unveiled into a political vacuum as the B.C. Liberal government picks a leader at the end February to replace Premier Gordon Campbell, who is stepping down after a wave of voter anger over a new tax policy. The opposition New Democrats are also picking a new leader.
Officials wrote a "status quo" budget, with no major spending to tax initiatives and C$350 million contingency fund, to give "as much flexibility as possible" to whoever takes over a premier, Finance Minister Colin Hansen said.
But the budget and government will face a major test this year, when voters will decide whether to scrap an agreement by Campbell last year to merge the provincial and federal sales taxes and create into a harmonized sales tax (HST) that covers more goods and services.
"It is true if the HST does not survive the referendum there will be increased risks to the plan," Hansen told reporters, adding that scrapping the HST would put the province's economy in "uncharted waters."
The vote in the westernmost Canadian province is scheduled for September but the opposition New Democrats say they will introduce legislation on Wednesday to move it up to June.
In addition to reducing tax revenues, the province would have to repay about C$1.6 billion that Ottawa agreed to pay it to accept the tax deal that is similar to deals already struck by Ontario, Quebec and the Atlantic provinces.
The government is forecasting the province will return to balanced budgets in two years, but those forecasts also assume the HST survives.
The province's total debt is forecast to rise to C$53.4 billion from last budget's C$47.3 billion, with the taxpayer-supported debt-to-GDP ratio increasing to 17.5 percent from 16.5 percent.
"We are living within our means," Hansen said.
But the Canadian Taxpayers' Federation said the rising debt level was "alarming" and on a per-capita basis, the province is much higher than in other jurisdictions with resource economies.
Provincial economists, who have a tradition of giving conservative economic forecasts, are projecting British Columbia's economy will grow by 2 percent in 2011, which is less than 2.7 percent forecast by private sector economists.
The province's economy, which weathered the recession better than much of North America, has still been hit by the slow recovery of the U.S. housing market and low natural gas prices.
($1=99 Canadian cents)
Reporting by Allan Dowd; Editing by Frank McGurty