BUDGET AND FISCAL PLAN 2003/04 – 2005/06
February 18, 2003	Ministry of Finance
Part 4: 2002/03 Updated Financial Forecast (Third Quarterly Report)

Table 4.1   2002/03 Budget and Forecast Updates

The deficit forecast for 2002/03 has improved by $200 million from the second Quarterly Report forecast. At $3.8 billion, the deficit which includes a $300 million forecast allowance for potential negative developments over the rest of the year, is now projected to be $600 million lower than forecast in the February 19, 2002 budget. Excluding forecast allowances, the updated deficit forecast would be $3.5 billion, $150 million less than the comparable budget forecast of $3.65 billion.

Chart 4.1 Progress of 2002/03 financial forecasts

Since the second Quarterly Report in November:

• The CRF revenue forecast has increased by $167 million, mainly due to improving natural resource revenues. This is partially offset by lower tax revenues resulting from weaker final 2001 corporation income tax assessments and a lower forecast for 2002 and 2003 income tax growth.
• The CRF spending forecast increased $112 million. A $275 million spending provision to assist with the transition to a sustainable forestry sector is partially offset by further below-budget spending due to lower debt interest costs, lower employment assistance caseloads in the Ministry of Human Resources and reduced spending in other areas.
• Crown corporations show a $55 million deterioration mainly due to a one-time $77 million negative accounting adjustment to BC Ferries' asset values, partially offset by improved operating results for ICBC.
• The forecast allowance has been lowered $200 million in recognition of reduced uncertainties remaining over the final quarter of the year.

Table 4.2 provides details on developments since the second Quarterly Report.

Revenue

The revenue forecast is $167 million higher than the second Quarterly Report. Significant changes include:

• Personal income tax — down $34 million due to weaker assumed personal income tax growth in 2002/03.
• Corporation income tax — down $19 million due to lower-than-assumed final assessments for the 2001 tax year that reduces the provincial share of the national tax base. In addition, the federal government reduced its forecast of the 2003 national tax base, thereby lowering March 2003 payments.
• Social service tax — down $20 million reflecting lower-than-expected revenue during the nine months up to December 2002.
• Property transfer tax — up $18 million reflecting a strong housing market.
• Natural resources — up $164 million. Revenue from petroleum, natural gas and minerals is expected to increase $72 million mainly due to higher natural gas prices. Forests revenue is forecast to be up $92 million due to higher timber harvest volumes.
• Federal transfer payments — up $12 million as final 2001 provincial income tax bases result in lower equalization payments, offset by higher Canada health and social transfer payments.

Further details on the full year revenue forecast are shown in Table 4.7 and key assumptions are provided in Appendix Table A.11.

Table 4.2  Summary of Updates Since the Second Quarterly Report

Spending

The spending forecast increased $112 million from the second Quarterly Report. Further below-budget spending of $163 million in ministries and in other areas is offset by a provision of $275 million for costs associated with the transition to a sustainable forestry sector.

The forecast update for ministries and other programs in part reflects spending trends experienced in the first nine months. During the first nine months ending December 31, 2002 spending was $826 million lower than expected reflecting below-budget spending in almost all programs and lower debt interest costs.

By year-end, all ministries and programs are expected to be on or below budget before factoring in a provision for forestry sector restructuring. After taking into account the one-time provision to assist with the transition to a sustainable forestry sector, total CRF spending will be $144 million below budget for the year.

Significant changes since the second Quarterly Report include:

• Ministry of Human Resources — down $47 million mainly reflecting a continuation of a downward trend in the employment assistance caseload and average costs per case. Based on current and expected trends, the monthly caseload is forecast to average about 132,000 or 10 per cent below budget for the year.
• Management of Public Funds and Debt (debt interest) — down $70 million mainly due to lower expected debt levels to year-end and lower expected short-term interest rates in the final quarter of the fiscal year.
• Forest Restructuring — A $275 million spending provision has been included in the forecast to assist with the transition to a sustainable forestry sector. Legislative and policy changes are still being developed and will be announced shortly. A supplementary estimate will be presented to the Legislature before the fiscal year-end.

As a result of successful management of ministry budgets and earlier-than-expected progress in meeting three-year service plan targets, ministries are reviewing their spending plans over the remainder of the 2002/03 fiscal year in order to address one-time funding needs in a number of priority areas. Some of these include:

These priority spending initiatives are included in the updated ministry spending forecasts shown in Table 4.8.

The second Quarterly Report identified spending pressures for the Ministries of Forests and Public Safety and Solicitor General. The updated forecast assumes that these pressures will be managed within ministry budgets or funded through the Contingencies Vote as shown in Table 4.3.

Table 4.3  Consolidated Revenue Fund — 2002/03 Pressures Allocated to the Contingencies Vote

A total of $127 million has been allocated to the Contingencies Vote, leaving $83 million available to address other spending pressures over the rest of the year. Further details on the spending forecasts are shown in Table 4.8 and assumptions are provided in Appendix Table A12.

Crown Corporations and Agencies

Crown corporation and agency net losses are projected to be $55 million higher than the second Quarterly Report. Significant changes include:

• BC Transportation Financing Authority (BCTFA) — a $17 million decrease in net loss reflects lower interest costs due to lower-than-expected interest rates and lower-than-anticipated borrowing reflecting higher fuel tax revenue.
• Accounting adjustment — a $77 million one-time negative adjustment to BC Ferries' asset values. Previously, an adjustment was made to reflect capital grants to the corporation from the CRF¹. Effective March 31, 2003, this adjustment will be reversed as BC Ferries' assets are being transferred to the new independent, regulated operating company.
• British Columbia Railway Company — a $30 million increase in BC Rail's net losses for 2002 is due to further restructuring costs. However, this loss will be offset by a $30 million gain on the anticipated sale of selected BC Marine assets in the first quarter of the 2003 calendar year (the last quarter of government's fiscal year).
• Insurance Corporation of British Columbia (ICBC) — a projected $18 million increase in net income for 2002 reflects higher premium revenue and lower claims and related costs.

Further details on the Crown corporation forecasts are shown in Table 4.9.

Chart 4.2 Changes to 2002/03 Budget Forecast

2002/03 Fiscal Year Review

Since the February 19, 2002 budget, revenue, spending and Crown corporation forecasts have, in aggregate, stayed close to or ahead of budget as significant changes to individual elements have largely offset each other.

The forecast for income tax revenues fell significantly as assessment reports for the 2001 tax year were received from the federal government. The lower-than-forecast estimates of 2001 personal and corporation income tax revenues reduce the tax base for 2002 and subsequent years. The estimated impact in 2002/03 was a $768 million loss in income tax revenues. This loss was more than offset by increases in other revenue sources, primarily equalization transfers and natural resources.

Overall government spending is now projected to be $144 million below budget. Excluding the provision for forestry restructuring, spending for the year would have been $419 million below budget due to lower debt interest costs, lower-than-assumed employment assistance caseloads, and below-budget spending in various ministries.

Crown corporation net losses are forecast to be $49 million higher than the February 19, 2002 budget. Taxpayer-supported Crown corporation net losses are forecast to be $37 million higher than budget, primarily due to accounting adjustments resulting from the restructuring of BC Ferries, partially offset by improved operating results for the BCTFA.

Commercial Crown corporation net results were $12 million lower than anticipated as an accounting policy change for BC Hydro led to higher contributions paid to the CRF. This was partially offset by improved operating results for ICBC. The deterioration in BC Rail's results during the January-to-March period was included in the province's 2001/02 financial statements. As well, a gain on sale of selected BC Marine assets is expected in the first quarter of 2003. Therefore, the reported losses are offset by an accounting adjustment that reflects BC Rail's net results during the province's fiscal year.

Capital Spending and Provincial Debt

Since the second Quarterly Report, the capital spending forecast has been lowered $268 million to total $2.2 billion. Significant changes are shown in Table 4.5.

In total, capital spending for the year is $551 million below the February 19, 2002 budget mainly due to lower spending for health and education facilities, ministry minor capital purchases, the SkyTrain extension project and ICBC's Surrey Central City project.

Table 4.4  2002/03 Budget and Forecast Updates — Capital Spending and Provincial Debt

Further details on capital spending are shown in Table 4.10. Information on updated forecasts for major capital projects (those with multi-year budgets totalling $50 million or more) is provided in Table 4.11.

Provincial debt is forecast to total $37.3 billion at year-end. The forecast is $1.64 billion lower than the second Quarterly Report due to an improved CRF deficit forecast, lower capital spending, timing differences between accrued spending and cash payments, lower working capital requirements and a lower debt forecast allowance mirroring the deficit forecast allowance (see Table 4.5). The decreased forecast continues a trend which saw the debt forecast decline by $1.82 billion as of the second Quarterly Report. Total debt is now forecast to be $3.46 billion below budget.

Further information on the debt forecast is shown in Table 4.12.

Table 4.5  Summary of Updates Since the Second Quarterly Report — Capital Spending and Debt

Table 4.6  Updated Forecast

Table 4.7  Consolidated Revenue Fund Revenue by Source

Table 4.8  Consolidated Revenue Fund Expense by Ministry

Table 4.9  Crown Corporation and Agency Updated Forecast

Table 4.10  Capital Spending

Table 4.11  Capital Expenditure Projects Greater Than $50 Million

Table 4.12  Provincial Debt

Table 4.13  Statement of Financial Position

Changes in Financial Position