Estimating the recessionary impact on B.C. finances—Part 1

The response to COVID-19 has had a significant impact on British Columbia’s economy and provincial finances. Less than three months ago, the Horgan government tabled a budget that projected positive economic growth and a small surplus in 2020/21. But these projections are no longer realistic. This two-part blog series estimates B.C.’s new budgetary balance and debt situation in 2020/21 due to lower than budgeted revenues and higher spending.

B.C.’s 2020 Budget projected an operating surplus of $527 million for 2020/21 (excluding the buffer, referred to as the forecast allowance). However, despite projecting this small operating surplus, net debt in the province was expected to grow by $4.3 billion. The province was expecting to accumulate debt because it separates annual spending (the operating budget) from long-term spending on items such as new schools and highways (the capital budget). We previously warned that this plan to accumulate debt was risky because of the potential for a recession.

Budget 2020 deficit and debt projections were based on optimistic economic assumptions (2.0 per cent real GDP growth). Major banks such as TD and CIBC, for example, now estimate that the provincial economy will shrink this year by 6.0 per cent and 6.1 per cent, respectively. The Business Council of British Columbia predicts an even larger economic contraction of at least 7.3 per cent.

Moreover, TD forecasts the unemployment rate will rise from 4.7 per cent in 2019 to 8.3 per cent in 2020 while CIBC predicts a larger increase to 9.7 per cent. To put this in perspective, the Horgan government anticipated an unemployment rate of 5.1 per cent in their spring budget.

There are two primary methods we can use to estimate the size of the provincial deficit in 2020/21. Both methods involve calculating the expected decline in key revenue sources such as personal income taxes, business taxes, and the provincial sales tax. The different approaches also take into account new spending measures recently announced by the B.C. government. The province has earmarked $3.5 billion to provide immediate relief to families and businesses and allocated another $1.5 billion for economic recovery in the longer-term.

The first method is to analyze the observed drop in these revenues during the most recent 2008-09 recession. Between 2008/09 and 2009/10, personal income tax revenues decreased 8.6 per cent whereas business income taxes declined 29.2 per cent and sales tax revenues dropped 3.7 per cent. The current recession could end up being more severe than 2008-09, but these values offer a conservative estimate for what might happen today.

If we assume these three revenue sources will experience the same decline as in the previous recession, the province will see revenues drop from budget projections by more than $3.9 billion in 2020/21. The combination of this decline in revenue and the promised $3.5 billion increase in spending brings the province’s annual deficit to $6.9 billion—excluding the forecast allowance—this year. And recall this deficit is only with respect to the operating budget.

The second method examines the drop in B.C.’s revenues based on the most recent national forecast by the Parliamentary Budget Officer (PBO). Although the PBO report has a national focus, it’s reasonable to use these numbers to provide a general idea of how the recession could impact the province’s finances.

The PBO predicts a 17.2 per cent decrease in personal income tax revenues, a 22.4 per cent decline in business income taxes, and a 26.7 per cent decline in sales (and related) taxes. Under this scenario, the province would experience a $5.9 billion decline in these revenues in 2020/21 compared to the spring budget. If we add in the $3.5 billion immediate increase in spending, B.C.’s deficit in 2020/21 would reach $8.8 billion (excluding the forecast allowance).

These two approaches also provide a similar conclusion to a recent provincial fiscal forecast from the Royal Bank that expects a multi-billion-dollar deficit for the province in 2020/21.

All of these projections indicate that B.C.’s fiscal situation will be much worse than the government anticipated just a few months ago. Simply put, B.C. will likely run a large deficit this year.

Part 2 of this blog series will show the corresponding calculations estimating the debt situation of the B.C. government in 2020/21.