BUDGET AND FISCAL PLAN 2003/04 – 2005/06
February 18, 2003	Ministry of Finance
Part 1: Three-Year Fiscal Plan

Table 1.1  Budget 2003 Fiscal Plan

Introduction

Budget 2003 updates the three-year fiscal plan tabled on February 19, 2002, and extends the plan to 2005/06.

The government's fiscal plan to balance the budget beginning in 2004/05 remains on track. A $2.3 billion deficit is projected for 2003/04. This includes a $500 million forecast allowance to cushion against negative developments. Before this forecast allowance, the deficit is estimated to be $1.8 billion, the same as forecast one year ago. Surpluses of $50 million and $375 million are now projected in 2004/05 and 2005/06.

Chart 1.1 Updated Plan to Balance the Budget

Table 1.2  Three-Year Fiscal Plan Update — Changes from Budget 2002

The updated plan reflects government's continued commitment to balance the budget beginning in 2004/05 and to build a strong and vibrant economy.

Balancing the budget beginning in 2004/05 while protecting health care and education

For 2002/03, government now forecasts a deficit of $3.8 billion, $600 million lower than forecast in the February 19, 2002 budget. The improvement results from lower debt interest costs and lower spending in government ministries. As well, the projected 2002/03 deficit incorporates a forecast allowance of $300 million, $450 million less than budgeted, reflecting reduced forecast risks over the rest of the fiscal year (for information on the updated forecast, see Part 4 — 2002/03 Updated Financial Forecast).

Table 1.3  Extending the Fiscal Plan to 2005/06

Reduced debt interest, lower employment assistance caseloads and other savings have freed up funds in 2002/03 enabling ministries to address key priorities. The extension of these factors beyond 2002/03, prudent fiscal management and a growing economy also provide incremental funding for ministries in 2003/04 and 2004/05 within the fiscal plan targets (see Table 1.2). The revenue forecast that underpins the fiscal plan is described in the revenue section on page 11.

Extending the plan to 2005/06, revenue is forecast to increase by $660 million over 2004/05. After allowing for a $221 million increase in CRF spending and a $114 million increase in taxpayer-supported Crown corporation spending above 2004/05 spending budgets, the projected surplus is $375 million (see Table 1.3).

The following is a summary of priority initiatives at the end of 2002/03 and funding increases made available in 2003/04, 2004/05 and 2005/06. Further information is provided in the CRF spending section on page 18.

Advanced Education — Grants for genome research and leadership and regional innovation chairs ($23 million) funded in the last quarter of 2002/03; a $30 million budget lift provided in 2005/06.

Children & Family Development — Early Childhood Development (ECD) Partnership Fund and an Aboriginal ECD Research Chair ($12 million) funded in the last quarter of 2002/03; a budget lift of $59 million in 2003/04 and $70 million in 2004/05 to fund school-based programs (CommunityLink), intervention for school-aged children with autism spectrum disorder and other programs. A further increase of $23 million is provided in 2005/06 for Safe Care and the Child and Youth Mental Health Plan.

Education — Reallocated savings are used to fund one-time grants to school districts in 2002/03 to improve student achievement ($50 million); base funding increases of $83 million in 2004/05 and a further $60 million in 2005/06.

Health Services — Grants for genome research and leadership chairs ($27 million) funded in the last quarter of 2002/03. No health funding increases are provided in the budget as the impact of the First Ministers' Accord on Health Care Renewal had not been fully determined when the budget was prepared. Initial estimates indicate that B.C. could receive $1.3 billion over three years — $325 million in 2003/04, $390 million in 2004/05 and $585 million in 2005/06. An additional $260 million may be available in 2003/04, subject to federal surplus availability. Updated service plans will be developed for the health ministries to reflect the new revenues, and these will be released following confirmation of funding in the federal budget. Supplementary Estimates will be presented to the Legislature to request approval for spending based on the incremental revenue received in 2003/04.

Human Resources — Recognizes savings in employment assistance caseloads in 2002/03 through 2004/05, a portion of which is used to fund other priorities; a $45 million budget lift is provided in 2005/06 to address program priorities.

Opening up B.C. by building a strong and vibrant economy

Budget 2003 includes specific targeted tax measures totalling $29 million by 2004/05 to further enhance the competitiveness of specific sectors:

• the budget for labour sponsored venture capital tax credits will be increased by $4 million to $16 million annually;
• a dedicated tax credit for New Media under the Small Business Venture Capital Program;
• new top-up credits for productions containing digital animation or special effects; and
• extension of the BC mining exploration tax credit and a commitment to match any extension of the federal government's mining exploration flow through share credit.

Further information on these and other Budget 2003 revenue measures are provided in Part 2 — Revenue Measures.

Prudent fiscal management, a growing economy and lower debt interest and employment assistance caseload forecasts provide the option to fund key areas in 2002/03 as well as a source of incremental funding in 2003/04 and 2004/05. To help build a strong and vibrant economy, the following initiatives have been undertaken (more information is provided under CRF spending on page 18).

Forests — Additional funding of $36 million in 2003/04 and $60 million in 2004/05 is available to expand activities in the BC Timber Sales program and revenue sharing with First Nations to increase their participation in the forest sector economy. In 2005/06, the ministry budget will rise a further $47 million to increase forest investments and expand revenue sharing with First Nations. A $275 million provision will be recognized in 2002/03 to assist with the transition to a sustainable forestry sector.

Community, Aboriginal and Women's Services — Additional funding of $37 million in 2003/04, $21 million in 2004/05 and $45 million in 2005/06 provides initial funding for the 2010 Olympic Winter Games venues and venues legacy, assuming a successful bid.

Competition, Science and Enterprise — Funding of $67 million in 2003/04, $62 million in 2004/05 and $70 million in 2005/06 provides for the province's share of the construction costs of the Vancouver Convention and Exhibition Centre expansion.

Transportation — Additional annual funding of $112 million during 2003/04 - 2005/06 will primarily be used to fund a service contract with BC Ferry Services.

A multi-year transportation infrastructure plan will invest $650 million raised from a 3.5 cent per litre provincial fuel tax increase. The plan will be implemented through the BC Transportation Financing Authority and is expected to leverage an additional $1.7 billion from federal and private sector partners. Over the next three years, additional transportation investment includes $158 million in 2003/04, $166 million in 2004/05 and $326 million in 2005/06. This plan will help ensure that the provincial transportation system can meet the demands of a modern, growing economy (see the Transportation Investment Plan topic box).

Capital Spending

In 2002/03, capital spending is expected to be $551 million below the February 2002 budget estimate. The change from budget mainly reflects lower spending for health and education facilities, ministry minor capital purchases, the SkyTrain extension project and ICBC's Surrey Central City project. Planned capital spending in 2003/04 is $97 million higher than last year's plan and $182 million higher in 2004/05, reflecting increased investments in B.C.'s transportation, tourism and power generation sectors.

Debt

Government debt at the end of the 2002/03 fiscal year is forecast to total $37.3 billion, $3.5 billion less than budget. The improvement results from lower-than-expected debt levels at the beginning of the fiscal year, a lower expected deficit in 2002/03, lower capital spending, advantageous financing transactions and decreased working capital requirements through the year. Forecast debt levels for 2003/04 and 2004/05 have been reduced from the previous plan as a result of the lower debt now forecast for March 31, 2003.

These lower debt levels also reduce the annual debt interest costs throughout the forecast. In turn, this provides additional funds that have been applied to economic and social priorities.

Generally Accepted Accounting Principles (GAAP)

The government is required by provincial legislation to fully conform to GAAP by the 2004/05 budget. As part of that commitment, the presentation of revenue, spending and Crown corporation and agency operating results has been adjusted in this budget to conform more fully to GAAP.

In previous years, the government's budget and fiscal plans included only the bottom-line results of taxpayer-supported Crown corporations and agencies. GAAP requires the financial activity of these organizations to be fully consolidated in government's financial reports. This means that assets, liabilities, revenues and expenses of taxpayer-supported Crown corporations and agencies must be added to those of the CRF. This change does not affect the government's bottom-line.

Government revenues now combine taxpayer-supported Crown corporation and agency revenues with CRF revenues. As well, government revenues include the net income of commercial Crown corporations. Similarly, government expenses now combine government ministry and other CRF spending with the expenses of the taxpayer-supported Crown corporations and agencies.

Expenses are detailed by functional area (health, education, economic development, etc.) in Appendix Table A9. Additional information on government's move to full compliance with GAAP is provided in the Converting to GAAP topic box at the end of Part 1.

Revenue

Chart 1.2 Revenue Forecast

Government revenue includes the combined revenues of the CRF, taxpayer-supported Crown corporations and net income of commercial Crown corporations. In 2003/04, revenue is forecast to be $26 billion, up 4.1 per cent from the updated forecast for 2002/03 (see Table 1.5).

This forecast includes the effects of 4.3 per cent nominal GDP growth in 2003, new tax measures of $252 million, and stronger revenue growth from natural resources due to higher natural gas prices and increased electricity entitlements set by treaty. These effects are partially offset by an expected BC Hydro net loss. In the next two years, revenue is forecast to grow 3.7 per cent per year on average as the economy posts an average 5.1 per cent annual nominal GDP growth. The revenue forecast also incorporates all policy measures that have been implemented since July 2001 to further enhance B.C.'s competitiveness and increase investment.

The forecast does not include any new health funding from the February 5, 2003 First Ministers' Accord on Health Care Renewal, as specific details regarding amounts and timing of payments were not finalized in time to be included in the budget.

Key assumptions and sensitivities relating to revenue are provided in Appendix Table A11.

Taxation Revenue

In 2003/04, revenue from taxation sources is forecast to increase $976 million over 2002/03 levels. Excluding the $300 million one-time loss in personal income tax revenue in 2002/03, overall taxation revenue in 2003/04 is forecast to be up 5.3 per cent due to stronger economic growth in 2003 and tax measures totaling $252 million. Between 2003/04 and 2005/06, revenue from taxation sources is expected to grow an average 5.1 per cent per year in line with nominal economic growth.

• Personal income tax — an annual increase of $506 million in 2003/04. Excluding the one-time $300 million revenue loss in 2002/03, growth of 4.6 per cent assumes the tax base increases 4.0 per cent. Over the next two years to 2005/06, personal income tax revenue is forecast to increase an average 6.3 per cent annually due to stronger personal income growth. Compared to 2001/02 and 2002/03, higher tax yields are expected throughout the forecast, consistent with the projected economic recovery and financial market stabilization. Revenue is down more than $400 million from the previous plan due to the effect of weaker-than-expected 2001 results on the tax base.
• Corporation income tax — an annual increase of $110 million in 2003/04. The 2003/04 forecast includes a $114 million payment to the federal government for overpayments in 2002, $152 million lower than the payment in 2002/03. The forecast assumes that revenue continues to grow in 2004/05 and 2005/06 as repayment adjustments fall and instalments from the federal government increase in line with national tax base growth. Revenue is forecast to be lower than assumed in the 2002/03 plan, mainly due to the effect of weaker-than-expected results in the 2001 tax year.
• Social service tax — broadly-based growth in taxable expenditures, particularly strength in consumer spending, is forecast to increase social service tax revenue by 4.7 per cent in 2003/04. Further increases in overall expenditures will result in sales tax revenue rising by an average 5.3 per cent per year between 2003/04 and 2005/06.

Table 1.4  Three-Year Revenue Forecast Update — Changes from Budget 2002

• Social service tax revenue in 2003/04 is now forecast to be slightly higher than was projected in last year's plan. In 2004/05, however, revenue is now projected to be $38 million higher than previously forecast, reflecting an increase in anticipated taxable expenditure growth in both 2004 and 2005.
• Fuel tax — a 3.5 cent per litre increase in the clear fuel tax collected on behalf of the BC Transportation Financing Authority (BCTFA), effective March 1, 2003, to fund the Transportation Investment Plan, will be partly offset by an additional 0.5 cent per litre increase in the clear fuel tax collected in Greater Vancouver and transferred to TransLink. The net impact of these changes, together with expected growth in fuel consumption, will push provincial fuel tax revenue up 28.7 per cent in 2003/04. Continued growth in fuel consumption volumes will generate a 2.6 per cent average annual increase in fuel tax revenue from 2003/04 to 2005/06. The forecast for fuel tax revenue in 2003/04 and 2004/05 is over $185 million higher than last year's plan, mainly due to increased tax collected on behalf of the BCTFA.
• Property tax — an increase in average gross school property tax rates of 2.5 per cent, in line with inflation, is expected to contribute to a 3.7 per cent increase in total property tax revenues in 2003/04. Continued growth in the property tax base and increases in school property tax rates tied to inflation will result in a 2.7 per cent average annual increase in total property tax revenues between 2003/04 and 2005/06. Property tax revenue is expected to be $34 million above last year's plan in 2003/04 and $60 million above in 2004/05, reflecting the 2003 Budget revenue measures affecting school property tax rates as well as changes in the property tax base.

Natural Resource Revenue

• Energy — Revenue from petroleum and natural gas will increase $325 million or 23 per cent in 2003/04 due to higher natural gas prices. Over the next two years, revenue declines an average 8.1 per cent per year as natural gas prices are expected to fall.
  Electricity sales under the Columbia River Treaty rise $150 million in 2003/04 due to an 80 per cent increase in the volume set by treaty. Revenue falls slightly by 2005/06 due to lower electricity prices.
  The overall revenue forecast from all energy sources is up from the previous plan as higher average natural gas and electricity prices offset lower natural gas volumes.
• Forests — commodity prices are expected to rise during 2003 but remain relatively low, and harvest volumes are forecast to fall below 2002/03 levels. This results in a $110 million revenue decline in 2003/04. Thereafter, revenue is expected to rise as average commodity prices and harvest volumes increase. The forecast assumes no resolution of the softwood lumber dispute and no change to stumpage policies. An increasing proportion of timber is expected to be made available through the BC Timber Sales program. Revenue in 2003/04 and 2004/05 is lower than in last year's plan due to lower prices and a higher-than-expected impact of countervail and antidumping duties on stumpage rates.

Other Revenue

This category includes revenues from Medical Services Plan premiums, fees, licenses, investment earnings, sales of goods and services, fines and other miscellaneous sources. This includes some of the revenue collected by ministries and treated as offsets to spending, as well as revenue earned by taxpayer-supported Crown corporations and agencies from sources outside government.

Other revenue declines in 2003/04 as the devolution of BC Ferries to the private sector results in the loss of fare revenue and lower concession sales. This is partly offset by government's investment earnings from the new private sector corporation. Over the next two years, total other revenue is forecast to increase an average 0.9 per cent per year.

Contributions from the Federal Government

Federal government payments received under the Canada health and social transfer and equalization programs are the major sources of transfer payments. Other sources include payments from the federal government for health, education, social, transportation and other cost-shared programs. This includes federal transfers to ministries that are treated as offsets to spending and payments received by taxpayer-supported Crown corporations and agencies.

• Canada health and social transfer (CHST) — in the 2003/04 to 2005/06 period, payments received under CHST are expected to grow in line with cash increases previously announced by the federal government and B.C.'s share of national population. No new federal health funding resulting from the recent First Ministers' Accord on Health Care Renewal has been assumed in the forecast.
• Equalization — after increasing in 2003/04 as B.C.'s economic growth lags Canada, B.C.'s equalization entitlements are forecast to level off in 2004/05 and 2005/06, as the gap between B.C.'s and Canada's nominal GDP per capita stabilizes. Due to the risk of historical revisions, the complex formula, and the amount of data needed to more accurately forecast equalization entitlements, the forecast for this source is unusually volatile. Depending on circumstances, changes to the equalization transfers may be partially offset by CHST payments.

Commercial Crown Corporation and Agency Net Income

• British Columbia Hydro and Power Authority — forecasts a $70 million loss for 2003/04, primarily due to dry weather conditions in the regions of the province where the hydro generation reservoirs are located. These are expected to result in low water inflows (87 per cent of normal) into the reservoirs, reducing hydro generation capability. The reduced availability of low cost hydro generation means that BC Hydro must meet its demand from higher cost thermal generation and imported power.
  The 2003/04 forecast represents a $470 million deterioration from BC Hydro's projection in last year's plan. A return to normal snow conditions in the outer years is assumed under the current plan, which will lead to a restoration of the corporation's profitability, although not at the level experienced in recent years. BC Hydro's current forecast does not include any rate changes that may result from a pending submission to the BC Utilities Commission later in 2003.
• British Columbia Liquor Distribution Branch (LDB) — at $655 million annually, LDB's projected net income is $5 million higher than the projection in the 2002/03 fiscal plan. While total liquor sales are forecast to be an average 4.5 per cent higher than previously forecast, the increase will be offset by higher commissions and product costs leaving the gross margin relatively unchanged. LDB anticipates cost savings as retail operations are devolved to the private sector; however, savings will be offset in the near term by restructuring costs including severance costs and lease buyouts.
• British Columbia Lottery Corporation — BC Lotteries projects net income of $725 million for 2003/04, a $10 million improvement over last year's forecast. The improvement is within the current gaming policy, and results from an increase in the number of slot machines to the current policy maximum of 5,400 and updating to industry-standard slot machines. The impacts of these changes are projected to result in more substantial gains in future years as the changes are implemented.
• British Columbia Railway Company — BC Rail's forecast for 2003 includes a gain on sale of parts of its marine division. Excluding the gain, BC Rail's forecast net income is $29 million for 2003/04, down $23 million from the 2003/04 projection in last year's fiscal plan. The forecast reflects the loss of all northeast coal traffic, which historically accounted for approximately 19 per cent of BC Rail's freight revenue base.
  In response to a core program review, BC Rail will focus on its remaining freight business, maintaining profitability through productivity improvements. BC Rail remains vulnerable to the U.S. lumber market as most of its freight customers are sawmills selling into that market.
• Insurance Corporation of British Columbia (ICBC) — At $45 million, ICBC's 2003 projected net income represents a $23 million improvement over the 2003 projection in last year's fiscal plan. The improvement is primarily due to lower operating costs, partially offset by higher claims costs and lower investment income. The ICBC projection does not assume changes due to the impact of moving into a regulated environment (see the Crown Corporation Restructuring Update topic box) or any potential accounting changes.

Table 1.5  Revenue by Source

Table 1.6  Expense by Ministry, Program and Agency

Expense

Chart 1.3 Ministry Spending¹

Consolidated Revenue Fund (CRF) Spending

The three-year spending plan for 2003/04 – 2005/06 remains consistent with the plan presented in February 2002. However, at the time of preparing the 2003/04 - 2005/06 Budget and Fiscal Plan, details of new federal funding for health care had not yet been confirmed. The 2003/04 to 2005/06 spending plans for the health ministries are based on the existing plans presented in February 2002 and do not include federal funding increases.

On February 5, 2003 the First Ministers' Accord on Health Care Renewal was announced. Under the accord, B.C. anticipates receiving new federal funding of $1.3 billion over the next three years. B.C. is committing every dollar of this funding toward health care. Once the provincial government has assessed the terms and conditions of the new funding against provincial priorities, revised service plans for the health ministries and Supplementary Estimates for 2003/04 additional spending will be presented to the Legislature.

Compared to the 2002/03 budget estimate, total CRF spending will fall by approximately $900 million or 3.5 per cent by the end of the next three years (see Table 1.6). CRF spending will decrease by about 1.9 per cent in 2003/04and by a further 2.5 per cent in 2004/05. As the economy and provincial finances improve, CRF spending will increase by 0.9 per cent in 2005/06.

Ministry spending, including the Premier's Office, will show an overall decline of 3.1 per cent by the end of the next three years (see Chart 1.3). Other spending, which includes debt interest, restructuring and special offices, will decline 10.1 per cent by 2005/06, mainly due to the end of restructuring funding in 2003/04.

The spending plan is based on ministry three-year service plans that have been updated to incorporate some modest changes in spending priorities, program reallocations and the addition of 2005/06 spending targets.

Table 1.7 provides a summary of major changes to the spending targets for 2003/04 and 2004/05 compared to last year's Budget and Fiscal Plan. In total, $99 million has been added to the spending target for 2003/04 and $274 million in 2004/05. These changes largely reflect the accommodation of various spending priorities within the fiscal plan, as a result of developments since last year.

Key assumptions and sensitivities related to ministry spending are provided in Appendix Table A12.

Highlights of Major Changes to 2003/04 and 2004/05

• Ministry of Children and Family Development — includes additional funding for school-based programs (CommunityLink), intervention for school-age children with autism spectrum disorder and other initiatives.

Table 1.7  Three-Year CRF Spending Plan — Major Changes from Budget 2002

• Ministry of Community, Aboriginal and Women's Services — includes additional funding to support construction of the Olympic venues and venues legacy funding, assuming that the provincial Olympic bid is successful.
• Ministry of Competition, Science and Enterprise — includes funding for the provincial share of the capital costs for the Vancouver Convention and Exhibition Centre expansion project.
• Ministry of Education — includes increased funding for grants to the public and independent schools to improve student achievement.
• Ministry of Forests — primarily includes additional funding for First Nations' participation in the forest economy; for the BC Timber Sales program to increase development and sales of Crown timber resources; and for forest protection.
• Ministry of Human Resources — due to significantly lower than expected employment assistance caseload, a portion of the savings has been reallocated to other government priorities such as programs in the Ministry of Children and Family Development.
• Ministry of Public Safety and Solicitor General — mainly includes additional funding for commercial vehicle safety and enforcement programs that have been transferred from ICBC.
• Ministry of Transportation — mainly includes funding for annual payments to BC Ferry Services for a coastal ferry services contract. Planned investments in transportation are made through the BC Transportation Financing Authority (see the Transportation Investment Plan topic box).
• Management of Public Funds and Debt — debt interest costs are significantly lower than expected due to lower debt balances and lower assumed long-term and short-term interest rates.
• Other Appropriations — provincial contributions for the seismic mitigation program to upgrade public sector facilities will be fully funded by 2002/03, one year earlier than planned, thus reducing funding requirements in 2003/04.

There are other changes to ministry budget and service plan targets due to program reorganizations. For example, the child care subsidy program has been transferred from the Ministry of Human Resources to the Ministry of Community, Aboriginal and Women's Services. Further information on program transfers can be found in Schedule A of the 2003/04 Estimates.

In 2005/06, total CRF spending is expected to increase $221 million compared to 2004/05. The spending plan incorporates the effects in 2005/06 of changes to ministry budgets as shown in Table 1.7, as well as increases in priority spending areas as shown in Table 1.3.

Part 4 — 2002/03 Updated Financial Forecast provides an update of developments in 2002/03. Spending for ministries and other programs was about 1.6 per cent below budget mainly due to lower debt interest costs, lower employment assistance caseloads in the Ministry of Human Resources and reduced spending in other areas. These improvements more than offset a onetime provision in 2002/03 to assist with the transition to a sustainable forestry sector, and as a number of these changes will also have an impact in the following years, they will contribute to accommodating a number of priority spending increases over the next three years.

Additional information on ministry budgets and service plans is provided on the government's website at http://www.gov.bc.ca.

Taxpayer-supported Crown corporation and agency expenses

Taxpayer-supported Crown corporations and agencies provide a number of services to the public. These agencies are primarily funded from ministry sources, but may also have outside sources of revenue. Some of the services provided by taxpayer-supported Crowns are highway construction (BC Transportation Financing Authority), property management (BC Buildings), property assessment, (B.C. Assessment Authority), social housing (BC Housing Management Commission), transit services (BC Transit), and legal services (Legal Services Society). Revenue and spending of taxpayer-supported Crown corporations are combined with CRF revenue and expenses in Tables 1.5 and 1.6. However, revenues and expenses for individual taxpayer-supported Crown corporations are detailed in Table A10.

The decrease in spending for 2003/04 is primarily due to the devolution of BC Ferries to a regulated private sector corporation that will be governed by a separate ferry authority. Spending decreases will continue in 2004/05 primarily due to spending reductions in BC Buildings. Increased spending in 2005/06 reflects the impact of the transportation plan on BCTFA's operating expenses.

Regional authority expenses

Ministry of Children and Family Development Governance Authorities — During 2003/04 to 2005/06, the Ministry of Children and Family Development will transfer authority for services in its Community Living Services and Child and Family Development programs to new governance structures. These bodies will be responsible for directing operations and managing funds and services. Prior to the establishment of permanent bodies, interim authorities will plan the transition of services. An increase in expense over the three years reflects the phased implementation of interim and permanent authorities and increased services. For further details, see the Ministry of Children and Family Development service plan.

Full-Time Equivalents (FTEs)

The 2003/04 projection for the taxpayer-supported FTEs, including ministries and special offices (CRF), and taxpayer-supported Crown corporations and agencies, and regional authorities, is 34,469 — a reduction of 2,134 from last year's fiscal plan. By 2005/06, FTEs are projected to decline to 31,174.

Last year, government's three-year plan anticipated an overall reduction of 11,813 FTEs from 2001/02 to 2004/05 for ministries and special offices. Some refinement of ministry restructuring plans and program transfers between the CRF and Crown corporations have resulted in a revised three-year reduction target of 11,179 FTEs.

Ministries and special offices (CRF)

The 2003/04 FTE projection for ministries and special offices is 29,049 FTEs — a net increase of 589 FTEs from last year's fiscal plan. The increase is due to additional FTEs being allocated to the new shared services agency and a number of other ministry changes. In addition, a number of program transfers between the CRF and various Crown corporations changed the allocation of FTEs between the CRF and Crown corporations and agencies. See Table 1.8 for details of changes from last year's plan. FTE projections are 23,867 in 2004/05 and 23,816 in 2005/06.

Taxpayer-supported Crown corporations and agencies

The 2003/04 taxpayer-supported Crown corporation and agency FTE projection is 5,270, a reduction of 2,873 FTEs from last year's fiscal plan. The reduction is primarily due to:

• the devolution of BC Ferries to the new independent BC Ferry Services (3,430 FTE reduction);
• a delay in the transfer of the PNE to the City of Vancouver, resulting in the PNE employment being included as part of government for one more year (438 FTE increase); and
• the impact of funding changes for the Legal Services Society being fully reflected in the FTE count (117 FTE reduction).

The details of other FTE changes are provided in Table 1.8.

The 2004/05 FTE projection of 4,593 reflects the devolution of the PNE and other planned reductions. Full details are available in the Crown corporations' and agencies' service plans

Regional authorities

In Budget 2002, the Ministry of Children and Family Development (MCFD) anticipated transferring up to 2,800 FTEs to governance authorities outside of the government reporting entity (GRE). It was subsequently determined that the governance authorities would remain inside the GRE. Consequently the 2,800 FTEs remain in the taxpayer-supported FTE count. In 2003/04, MCFD will begin this process by transferring 150 FTEs for Community Living Services to the governance authority with the remainder to be transferred in 2004/05.

Table 1.8  Three-Year Fiscal Plan Update — Full-Time Equivalents (FTEs) Changes from Budget 2002

Capital Spending

Chart 1.4 Capital Spending Plan

Capital spending¹ is needed to replace ageing infrastructure and to meet the needs of a changing population. Financing for the building of schools, hospitals, long-term care facilities, roads, dams and other forms of provincial infrastructure is largely met through borrowed funds and is a major component of provincial debt.

Over the next three years, combined annual capital spending of the government and taxpayer-supported and commercial Crown corporations and agencies will rise to $2.5 billion before falling back to $2.1 billion. The decline reflects the impact of government's Capital Asset Management Framework that balances the need for provincial infrastructure with the province's financial capacity. The framework encourages alternative service delivery and public-private partnership (P3) opportunities to meet the province's infrastructure requirements. P3s are expected to play a key role in the provincial Transportation Investment Plan (see topic box). For example, P3s are proposed for the Academic Ambulatory Care Centre in Vancouver and the Fraser Valley Health Centre/Eastern Fraser Valley Cancer Centre in Abbotsford.

Funding for Olympic venues is included as grants in the operating budget of the Ministry of Community, Aboriginal and Women's Services and therefore is not included as capital spending.

In 2003/04, capital spending will increase $334 million from the updated2002/03 forecast to total $2.5 billion. The increase mainly reflects higher spending for transportation infrastructure, health facilities, ministry capital, expansion of the Vancouver Convention and Exhibition Centre and BC Hydro projects. After 2003/04, capital spending will decline $135 million in 2004/05 and $251 million in 2005/06.

Significant changes in capital spending over the next three years are primarily due to:

• increased spending for transportation projects as part of the Transportation Investment Plan;
• expansion of the Vancouver Convention and Exhibition Centre;
• reduced spending for schools reflecting completion of ongoing projects combined with a reduction in the need for new student spaces; and
• reduced spending for health facilities reflecting affordability of governmentfunded capital projects combined with planned investments through P3s.

Further details on capital spending over the next three years are shown in the service plans of ministries and Crown corporations.

As required under the Budget Transparency and Accountability Act, significant capital projects with multi-year budgets totalling $50 million or more are shown in Table 1.10. Annual allocations of the full budget for these projects are included as part of the provincial government's capital spending shown in Table 1.9.

Table 1.9  Capital Spending 2002/03 to 2005/06

Table 1.10  Capital Expenditure Projects Greater Than $50 Million

Over the next three years $1.3 billion will be spent on major capital projects (greater than $50 million) including:

• $91 million for existing major transportation capital projects. In addition, the Ministry of Transportation is investigating financial and project delivery options through P3s, for improvements to the Okanagan Lake Bridge in Kelowna, Park Bridge in the Kicking Horse Canyon and the Sea-to-Sky highway to Whistler.
• $196 million for health and education facilities including the Vancouver General Hospital, Prince George Regional Hospital and the UBC Life Sciences Centre.
• $691 million for power generation capital projects by BC Hydro and the Brilliant Expansion Power Corporation.
• $295 million for other projects including expansion of the Vancouver Convention and Exhibition Centre and tenant improvements for Surrey Central City.

Debt

In 2002/03, provincial debt is forecast to increase by $1.4 billion to total $37.3 billion, $3.5 billion below budget. In 2003/04, provincial debt will increase $3.7 billion from the 2002/03 updated forecast to total $41 billion.

The 2003/04 change reflects:

• a $2.8 billion increase in taxpayer-supported debt to finance operating and net capital requirements;
• a $733 million increase in commercial Crown corporation debt, largely due to increased borrowing for BC Hydro; and
• an increase of $200 million to the debt forecast allowance to bring the total to $500 million (to mirror the income statement forecast allowance).

Over the following two years, taxpayer-supported debt will increase $576 million reflecting the annual operating and capital requirements under the fiscal plan. Self-supported debt will increase $524 million, mainly due to increased commercial debt to fund BC Hydro's capital program.

The debt forecast assumes a borrowing allowance of $500 million to mirror the deficit forecast allowance. This has the effect of raising the debt forecast by $500 million in 2003/04 and each subsequent year. However, should the government not require this allowance, projected debt levels under the fiscal plan would be $500 million lower for 2003/04 and thereafter.

Table 1.11  Provincial Debt Summary

The ratio of taxpayer-supported debt, which excludes commercial Crown corporations and other self-supported debt, to GDP is a key measure often used by financial analysts and investors to assess a province's ability to repay debt. In 2003/04 taxpayer-supported debt is forecast to increase to 23 per cent of GDP before declining to 22.1 per cent of GDP in 2004/05 and 21.1 per cent of GDP in 2005/06. The change from the Budget 2002 forecast reflects the $2.3 billion improvement in taxpayer-supported debt in 2002/03 and higher 2002 economic growth. Taxpayer-supported interest costs are expected to remain stable at just under eight cents per dollar of revenue over the three-year period.

Table 1.12 summarizes the provincial financing plan for 2003/04. New borrowing of $6 billion is anticipated, of which $2.3 billion will be used to replace maturing debt and $3.7 billion to finance capital and operating requirements.

Table 1.12  Provincial Financing

Further details on the debt outstanding for government, Crown corporations and agencies are provided in Appendix Tables A15 and A16.

Chart 1.5 Taxpayer-Supported Debt-to-GDP

Risks to the Fiscal Plan

The risks to the fiscal plan stem mainly from changes in factors that government does not directly control. These include:

• Assumptions underlying revenue and Crown Corporation and agency forecasts such as economic and population growth, commodity prices and weather conditions.
• The outcome of litigation, arbitrations, and negotiations with third parties, such as the softwood lumber dispute.
• Debt interest rates and utilization rates for government services.

Table 1.13 summarizes the average bottom-line effect of changes in some of these variables. However, individual circumstances and inter-relationships between the variables may cause the actual variances to be higher or lower than the estimates shown in the table. For example, a decrease in equalization payments may offset an increase in natural resource revenue.

Table 1.13   Fiscal Sensitivities

* Revenue effects before adjustments due to equalization

Revenue

The revenue forecast contained in the fiscal plan is based on the economic forecast detailed in Part 3 — British Columbia Economic Review and Outlook. Details on major assumptions and sensitivities resulting from changes to those assumptions are shown in Appendix Table A11. The main uncertainties in the revenue forecast are:

• personal and corporate income tax assessments for 2002;
• B.C.'s overall economic performance;
• commodity prices, especially natural gas, lumber and electricity;
• the outcome of the softwood lumber dispute with the U.S.;
• how long low water levels will continue in the BC Hydro system; and
• B.C.'s equalization entitlements.

The equalization formula is very sensitive to economic developments in other provinces as well as in B.C. Additionally, changes to the equalization formula and revised population estimates as Statistics Canada finalizes the 2001 Census results, could all have significant effects on revenue.

Crown corporations and agencies have provided their own forecasts that were used to prepare the fiscal plan, as well as their statements of assumptions. The boards of those corporations and agencies have included these forecasts, along with further details on assumptions and risks, in the service plans being released with the budget.

The fiscal plan does not assume or make allowance for extraordinary adjustments other than those noted in the assumptions provided by the Crown corporations and agencies. Factors such as electricity prices, water inflows into the BC Hydro system, accident trends, interest/exchange rates, decisions of an independent regulator, or pending litigation could significantly change actual financial results over the forecast period.

New decisions or directions by Crown corporation or agency boards of directors may result in additional costs due to restructuring, valuation allowances and asset write-downs, or gains and losses on disposals of businesses or assets. In addition, government is continuing to review the treatment of grants-in-lieu of property taxes paid by Crown corporations, although the overall fiscal impact of any change is not anticipated to be large.

In situations where revenue could benefit as a result of a negotiated or litigated settlement, no revenue increases have been assumed except where a detailed agreement-in-principle has been reached, as in the sale of components of BC Rail's marine division. Specifically no assumptions have been made as to potential benefits from various outstanding liabilities owing to BC Hydro, potential resolution of the softwood lumber dispute with the U.S., or possible border tax. Additionally, due to uncertainty as to the amounts and timing of revenues indicated in the February 5, 2003 First Ministers' Accord on Health Care Renewal, no Accord-related federal transfers have been included in Budget 2003.

Spending

The spending forecast contained in the fiscal plan is based on ministry and taxpayer-supported Crown corporation and agency spending plans and strategies. Details on major assumptions and sensitivities resulting from changes to those assumptions are shown in Appendix Table A12 and in ministry service plans.

Several options exist for dealing with major financial risks, should they arise. Ministries and Crown corporations and agencies may take action to mitigate the impact through specific or general cost reduction measures or reductions in service levels.

Highlights of spending risks:

Compensation

From March 31, 2003 through March 31, 2006 virtually all public sector collective agreements expire. The Working Agreement with the British Columbia Medical Association also expires during this period. The government's current bargaining mandate is 0-0-0 for the 2003/04 to 2005/06 period. Public sector employers may address legitimate skills shortages through market adjustment increases; however the government has not provided incremental funding to employers for market adjustment increases.

Demand-driven Programs

The government funds a number of demand-driven programs such as Pharmacare, K-12 education, student financial assistance and income assistance. The budgets for these programs reflect the best estimate of demand and other factors such as labour costs and price inflation. If demand is higher than estimated, this will result in a spending pressure to be managed.

Public Sector Program Delivery

The vast majority of government funded services are delivered through third party delivery agencies that provide programs such as acute and continuing health care, K-12 education, post-secondary education, and community social services. All of these sectors face cost pressures in the form of program demand, non-wage inflation and compensation increases.

The provincial government has implemented legislative changes to provide public sector delivery agencies with greater flexibility to determine how they will deliver services. The lower cost structure made possible by the legislative changes and upcoming accountability contracts with public sector delivery agencies is reflected in this plan. If public sector delivery agencies are unable to achieve the estimated savings, budgetary pressures could arise.

Treaty Negotiations

The government is committed to negotiating affordable, working treaties with First Nations that provide certainty, finality and equality. The province will focus resources on key opportunities in order to reach settlements with First Nations and Canada over the next two to three years. Outcomes of negotiations could affect both the economic outlook and the fiscal plan.

Restructuring Costs

Ministry restructuring costs are based on preliminary estimates. Restructuring is a complex and detailed undertaking that takes time to plan and implement. The fiscal plan assumes that the restructuring process will be complete in 2003/04 and includes $190 million in non-recurring operating costs related to ministry restructuring. This estimate is based on assumptions around the number of people expected to leave government and the average cost of their departure, assumptions around reduced requirements for office space, and other costs such as systems changes, asset disposals and contract cancellation penalties.

As ministries implement their restructuring plans, better estimates of actual costs will become available. This could result in restructuring costs being higher or lower than assumed in the fiscal plan.

Catastrophes and Disasters

The spending plans for the Ministries of Forests; Public Safety and Solicitor General; and Water, Land and Air Protection include amounts to fight forest fires and other emergencies such as floods and blizzards. These amounts are based on a ten-year history of actual spending and on conditions of normal to moderate severity. Abnormal occurrences may affect expenses in these ministries and those of other ministries.

Pending Litigation

The spending plan for the Ministry of Attorney General contains provisions for settlements under the Crown Proceeding Act based on estimates of expected claims and related costs of settlements likely to be incurred. These estimates are based on a historical ten-year average of actual spending. Litigation developments may occur that are beyond the assumptions used in the plan (for example, higher-than-expected volumes, or size of claim amounts and timing of settlements). These developments may also affect expenditures in other ministries.

One-time Write-downs and Other Adjustments

Ministry budgets provide for normal levels of asset or loan write-downs. The overall spending forecast does not make allowance for extraordinary items other than the amount provided in the contingencies vote.

Contingencies

The fiscal plan includes a CRF contingencies vote of $170 million in 2003/04 and $200 million in 2004/05 and 2005/06, to help offset unforeseen spending pressures.

Accounting Policy

Government has committed to fully adopt generally accepted accounting principles (GAAP) by 2004/05 (see the Converting to GAAP topic box). Health authorities, hospital societies, school districts and certain post-secondary institutions will be included in the Government reporting entity by 2004/05.The expanded entity is not expected to have a material impact on the government's bottom-line.

Capital Risks

The capital spending forecasts assumed in the fiscal plan may be affected by various factors including:

• weather and geotechnical conditions causing project delays or unusual costs;
• changes in market conditions, including service demand, inflation, borrowing costs and wage settlements;
• the outcome of environmental impact studies;
• cost-sharing agreements with other jurisdictions; and
• the ability to negotiate public-private sector partnership agreements.

Forecast Allowance

In 2003/04, the government will continue to build a forecast allowance into the bottom-line to act as a cushion against possible deterioration in revenue and expense forecasts, and thus increase the likelihood of meeting the deficit target established in the fiscal plan.

A forecast allowance of $500 million — about two per cent of revenues — is included in the 2003/04 budget. This forecast allowance increases the expected deficit from the government's most likely forecast of $1.8 billion in 2003/04 to a more conservative forecast of $2.3 billion.

A corresponding $500 million borrowing allowance has also been included in the provincial debt forecast for 2003/04.

Forecast allowances are not included in the fiscal plan for the 2004/05 and 2005/06 years. The government will incorporate annual forecast allowances in the budgets for those years based on a risk assessment at that time.