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CALGARY, Alberta (Reuters) - British Columbia's move to scrap a sales tax following a public backlash will cost the province C$2.3 billion over the next three years and force a round of new spending cuts, the provincial government said on Thursday.
The tax move and expectations of worsening world economic conditions will contribute to a deficit of C$2.8 billion in the current fiscal year and C$805 million in 2012-13, Finance Minister Kevin Falcon said in his first-quarter report.
All ministries and agencies in Premier Christy Clark's government must now cut costs and manage spending, Falcon said. The Liberal government will seek to protect health care and education while it consults with voters on priorities for the next budget, he said.
In a referendum last month, voters in British Columbia chose to dismantle the harmonized sales tax (HST), which merged the province's 7 percent sales tax with a 5 percent federal goods and services levy.
Many residents were angry because the government had promised not to combine the taxes and because the HST was extended to items such as restaurant bills, which had not been subject to the province's sales tax.
Scrapping the HST means British Columbia must reimburse in 2011-12 the C$1.6 billion the federal government gave it to ease the transition to the new tax.
Falcon said provincial revenues are now forecast to rise by an average of just 2.8 percent annually over the next two years, which is down from the outlook of 3.3 percent in the government's spring budget.
Excluding the impact of returning to a provincial sales tax, lower revenue from natural resources and government-owned corporations will mean losses of C$537 million over the next three years, the government said.
Falcon said the government must reduce the deficit by C$458 million in 2013-14 to balance the budget as required by law.
Reporting by Jeffrey Jones; editing by Peter Galloway