Jan 25, 2009

Fiscal tipping points


Budget making is an art. An underlying reality of BC budgeting is that it takes very little to tip provincial finances from surplus to deficit and back again, mainly due to factors outside the province’s control. Recall, for example, that during the Liberal’s first mandate, they inherited a surplus, then brought down two of the largest deficits in BC history, and then the laregest surpluses in BC history, all within four years. BC went from a deficit of over $2.5 billion in 2002/03 to a surplus of over $2 billion just two years later — things can change very quickly (for an illustration, see this CCPA report.)

But it works the other way too. While we’ve experienced large surpluses the last four year, this can easily shift into a deficit, even without any new tax cuts or spending increases. Rather, all it takes is one year of negative growth, and government revenues drop of precipitously, and automotic stabilizers like welfare spending kick in, well, automaticaly. And before you know it, presto — we’re back in the red.

Given this, both the Liberals and NDP have got themselves painted into a difficult corner. If they stick rigidly to their commitment to balance the budget, they may be left with no choice but to significantly cut spending, thereby worsening the economic situation and compounding job loss. More likely, as we witnessed after the October federal election, whoever wins the May election will quickly pull what Harper has, and confess that balancing the budget cannot actually be done. Too bad we can’t have that honest debate now, and avoid further delaying needed fiscal stimulus.

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