Part 4: 2003/04 UPDATED FINANCIAL FORECAST (THIRD QUARTERLY REPORT)

		Table 4.1  2003/04 Budget and Quarterly Updates – Operating Statement

Introduction

The deficit forecast for 2003/04 has improved by $590 million from the second Quarterly Report forecast. At $1.71 billion, the deficit (which includes a $100 million forecast allowance for potential negative developments over the rest of the year) is now projected to be $590 million lower than forecast in the February 18, 2003 budget. Excluding forecast allowances, the updated deficit forecast would be $1.61 billion, $190 million less than the comparable budget forecast of $1.8 billion.

The third Quarterly Report forecast does not include the SUCH sector (schools, universities, colleges, health authorities) since the sector was not included in Budget 2003. Including these entities is part of government's compliance with full GAAP, starting in the 2004/05 fiscal year. The effect of including the SUCH sector would be a $66 million improvement bringing the 2003/04 deficit to $1.64 billion.

Restatements of the 2003/04 budget and updated forecast to include the SUCH sector are used in Part 1 to enable appropriate comparison of the 2003/04 forecast to the three year fiscal plan that starts in 2004/05.

Chart 4.1  Progress of 2003/04 financial forecasts

The 2003/04 Public Accounts will be prepared on the same basis as the 2003/04 Estimates and exclude the SUCH sector. However, estimates of final 2003/04 results that include the SUCH sector will also be provided as supplemental information.

2003/04 Fiscal Year in Review

Since the February 18, 2003 budget, the deficit forecast has remained relatively unchanged despite significant revenue and expenditure shocks, including losses to equalization revenues and the costs of forest fires, floods and bovine spongiform encephalopathy (BSE). These shocks offset improvements to Crown corporation finances, taxation revenues and other areas, as well as higher energy revenues reflecting the record drilling rights sale in September 2003.

Lower overall ministry spending and lower debt interest costs also helped to offset the revenue and expenditure shocks, and at the same time provide room for $138 million of priority initiatives including the acceleration of $72 million in funding to support the 2010 Olympic and Paralympic Winter Games (2010 Olympics). Table 4.9 provides further information on the changes since Budget 2003.

In the updated deficit forecast, the forecast allowance has been reduced by $400 million, from the $500 million established a year ago to $100 million, reflecting reduced uncertainty over the remainder of the fiscal year. In total these changes reduced the deficit forecast from $2.3 billion at budget to $1.71 billion.

The BC Rail investment partnership is forecast to have no impact on the 2003/04 deficit as the $182 million net income gain by BC Rail is offset by the $182 million reinvestment in Northern and First Nations communities and other initiatives.

Chart 4.2  2003/04 deficit improved by $590 million

Third Quarterly Report Overview

Since the second Quarterly Report in November:

• Total revenue, including commercial Crown corporation net income, increased $393 million. Taxpayer-supported revenue is up $48 million as higher taxation revenue was partially offset by lower federal transfers and natural gas royalties. Commercial Crown corporation net income increased by $345 million reflecting completion of the BC Rail investment partnership, that is assumed to occur in March 2004, and higher ICBC and BC Hydro incomes.
• Total spending increased $153 million from the previous forecast. The CRF spending forecast increased $342 million, mainly due to the assumed distribution of the BC Rail investment partnership proceeds to regional economic development, First Nations, transportation infrastructure and other initiatives. The forecast also has been updated to reflect accelerated funding for the 2010 Olympics and spending for other priority areas from lower debt interest costs, ministry savings and other spending forecast reductions.
• Completion of the BC Rail investment partnership has no impact on the deficit for 2003/04, since the $182 million estimated increase to BC Rail's net income is offset by an equal $182 million reinvestment in Northern and First Nations communities and priority initiatives. The $200 million cash redistribution to the BC Transportation Financing Authority also has no effect on the bottom line since it is an internal transfer. These reinvestments and redistributions are contingent on the transaction closing in 2003/04.
• The forecast allowance has been lowered to $100 million, a reduction of $350 million, in recognition of reduced uncertainties remaining over the final quarter of the year.
• In total, revenue, expense and forecast allowance changes have reduced the forecast 2003/04 deficit by $590 million from $2,300 million to $1,710 million.

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

		Table 4.2  Operating Statement Update Since the Second Quarterly Report

Revenue

The revenue forecast update in part reflects trends experienced in the first nine months of the fiscal year. During the nine months ended December 31, 2003, revenue was $593 million higher than expected, reflecting improved commercial Crown corporation net incomes and stronger energy revenues.

The full-year revenue forecast is $393 million higher than the second Quarterly Report, and $495 million above the forecast in Budget 2003. Significant changes since the second Quarterly Report include:

• Personal income tax – up $44 million mainly due to lower mutual fund refunds for 2002 based on final tax assessments (as of December 31, 2003).
• Corporate income tax – up $38 million due to higher-than-assumed final assessments for the 2002 tax year that reduces the prior year adjustment payment to the federal government.
• Social service tax – up $50 million reflecting improved collections in the three months to December 2003, compared to the first six months of the fiscal year.
• Other taxes – Fuel tax up $8 million due to improved collections; tobacco tax up $10 million reflecting the tax increase effective December 20, 2003; property tax up $19 million mainly due to a change in accounting for the tax collected by municipalities for BC Transit (previously recorded as miscellaneous revenue); and property transfer tax up $12 million reflecting ongoing strength in the housing market.
• Natural gas royalties – down $33 million due to lower assumed production volumes. Volumes are expected to decline 2.5 per cent from the previous year (a 0.3 per cent decline was assumed in the second Quarterly Report), reflecting weaker demand in the Pacific Northwest.
• Other revenue – up $77 million reflecting higher miscellaneous recoveries and sales of goods and services by taxpayer-supported Crown corporations, partially offset by reduced recoveries of interest costs from commercial Crown corporations.
• Equalization – down $149 million, reflecting improved 2002 BC tax assessments and weaker Ontario results. The forecast assumes a $68 million decline in respect of 2003/04 and a negative $81 million prior year adjustment for 2002/03.

Prior-year adjustments result from differences between updated estimates and the amounts included in the 2002/03 Public Accounts. The current BC forecast for 2001/02 and 2002/03 entitlement is $153 million and zero, respectively. This results in a negative prior-year adjustment of $549 million, as the 2002/03 Public Accounts estimates were $159 million and $543 million for 2001/02 and 2002/03.

Consequently, revenue for 2003/04 is forecast to be negative $149 million as a 2003/04 entitlement of $400 million is offset by a $549 million prior year adjustment. For more information on Equalization, see the topic box in the 2003/04 second Quarterly Report released on November 28, 2003.

The federal government's estimates for BC (as of October 2003) are $153 million, $212 million and $557 million for 2001/02, 2002/03 and 2003/04. BC's 2002/03 and 2003/04 estimates are lower since they incorporate more recent information on 2002 taxation revenue from the provinces.

• Canada health and social transfer (CHST) – up $7 million. CHST revenue increased $46 million mainly due to a partial offsetting effect of the decrease in equalization entitlement in respect of 2002/03. Revenue from the Medical/Equipment Trust is $39 million lower due to timing differences in capital purchases. This has no effect on the deficit since revenue and expense changes are identical. There is also no change to the assumption that $200 million will be spent on equipment over three years.

Commercial Crown Corporation Net Income

• BC Hydro projects operating results of $190 million (before rate stabilization transfers) for 2003/04. This is a $44 million improvement since the update provided in the second Quarterly Report, and is primarily due to a reduction in finance charges as a result of lower interest rates and to an increase in revenues from the residential sector due to weather impacts.
• The Liquor Distribution Branch has improved its projected result for 2003/04 by $18 million due to higher sales and reduced operating costs, partially offset by an increase in the discounts provided to licensee retail stores.
• The BC Rail preliminary results for 2003 (BC Rails' fiscal year) shows a slight improvement since the previous forecast update, primarily due to reduced operating costs. As the BC Rail investment partnership is anticipated to conclude by March 31, 2004 (within the government's 2003/04 fiscal year), revenue has been adjusted to add the $182 million net impact to BC Rail's net income. More information on the BC Rail investment partnership can be found in a topic box in Part 1.
• ICBC's preliminary (before audit) results for the 2003 calendar year are $99 million higher than the projection in the second Quarterly Report. The improvement is primarily due to higher premium revenue and investment earnings, lower operating costs, and a positive adjustment to claims costs resulting from ICBC's annual claims review in December. This was partially offset by an increase to prior-year claims costs resulting from the estimated impact of a potential legal tariff increase. Depending on the recommendations of its auditors, ICBC's final results for 2003 could vary by up to $20 million from the preliminary report.

Further details on the full year revenue forecast are shown in Table 4.10 and key assumptions are provided in Appendix Table A10.

Spending

By year-end, total spending for ministries and other areas is expected to be $227 million below budget before factoring in Supplementary Estimates and the BC Rail investment partnership. Lower debt interest costs account for the largest savings at $171 million. These savings have been redirected to address the government's priority of accelerating the funding of the 2010 Olympics, as well as to reduce the impact of natural disaster costs.

The updated consolidated revenue fund (CRF) forecast reflects:

• Planned legislation to (a) reinvest $182 million from the BC Rail investment partnership in the Northern Development Initiative, the BC Rail First Nations Benefit Trust, Legacies Now and other Heartlands initiatives and (b) distribute $200 million of cash proceeds to the BC Transportation Financing Authority for reinvestment in the transportation plan. Further information is provided in a topic box in Part 1.

		Table 4.3  Priority Spending

• A planned Supplementary Estimate of $434 million to cover the projected additional costs of responding to natural disasters, including forest fires, floods and BSE assistance.
• Further forecast reductions, below-budget spending and potential savings of $178 million in ministries and in other areas including debt interest.
• A planned Supplementary Estimate of $72 million to accelerate funding for the 2010 Olympics subsequent to the successful bid.
• A $66 million allocation of savings to priority initiatives, as listed in Table 4.3.

In total, the CRF spending forecast increased $342 million from the second Quarterly Report, and is now $661 million above budget.

The forecast update for ministries and other programs in part reflects spending trends experienced in the first nine months of the fiscal year. During the nine months ended December 31, 2003, spending was $281 million lower than expected, excluding $336 million of costs related to forest fires and floods in the Ministries of Forests and Public Safety and Solicitor General. This reflected below-budget spending in most programs and significantly lower debt interest costs.

Other significant changes since the second Quarterly Report include:

• Ministry of Forests — down $30 million mainly reflecting lower costs of the BC Timber Sales Program as a result of lower than assumed timber sales activity.
• Management of Public Funds and Debt (debt interest) — down $40 million reflecting final borrowing plans for the remainder of the year.

As a result of successful management of in-year ministry budgets, ministries have reviewed their spending plans and potential savings over the remainder of the 2003/04 fiscal year and addressed one-time funding needs in a number of priority areas. These priority spending initiatives are detailed in Table 4.3, and are included in the updated spending forecasts shown in Table 4.11.

The second Quarterly Report identified spending pressures for the Ministry of Attorney General. The updated forecast assumes that these pressures will be managed within the ministry's budget or funded through the Contingencies vote.

A total of $80 million has been allocated against the Contingencies vote, leaving $90 million available to address other spending pressures over the rest of the year.

When cost estimates for the provincial natural disasters in 2003/04 are finalized, a Supplementary Estimate will be presented in the Legislature. Table 4.5 details the current $506 million forecast of provincial disaster costs and the proposed funding sources. The revenue forecast for 2003/04 assumes $148 million of federal assistance. However, the province is continuing discussions with the federal government to ensure appropriate cost recovery of provincial disaster costs.

The total spending forecast includes taxpayer-supported Crown corporations and adjustments for internal transfers. The effect of these is to reduce the CRF variance by $356 million, resulting in total spending being $305 million above the budget forecast and $153 million higher than the second Quarterly Report forecast. Excluding the costs of natural disasters and the BC Rail investment partnership, total spending is $379 million below budget.

Further details on the spending forecasts are shown in Table 4.11 and assumptions are provided in Appendix Table A11.

		Table 4.5  Natural Disaster Costs

Capital Spending and Provincial Debt

Since the second Quarterly Report, the capital spending forecast has increased $80 million to total $2.319 billion, but remains $194 million below the Budget 2003 amount of $2.513 billion. This is mainly due to lower spending for health and education facilities, ministry minor capital purchases, the SkyTrain extension project and BC Hydro power projects.

Significant changes since the second Quarterly Report are shown in Table 4.7. Further details on capital spending are shown in Table 4.12. Information on updated forecasts for major capital projects (those with multi-year budgets totaling $50 million or more) is provided in Table 4.13.

		Table 4.6  2003/04 Budget and Quarterly Updates – Capital Spending and Provincial Debt

Provincial debt is forecast to total $37.3 billion at year-end, 26.5 per cent of GDP, while taxpayer-supported debt is expected to total $30.1 billion or 21.4 per cent of GDP. The debt to GDP ratios forecast in Budget 2003 for total and taxpayer-supported debt were 29.4 per cent and 23.0 per cent respectively.

The total debt forecast is $1.4 billion lower than the second Quarterly Report mainly due to an improved CRF deficit forecast, improved cash flows, lower BC Transportation Financing Authority debt, the defeasance of BC Rail's debt, and elimination of the debt forecast allowance (see Table 4.7). The decreased forecast continues a trend that saw the debt forecast decline by $2.2 billion as of the second Quarterly Report. Total debt is now forecast to be $3.6 billion below budget.

Further information on the debt forecast is shown in Table 4.14.

		Table 4.7  Capital Spending and Debt Update Since the Second Quarterly Report

		Table 4.8  2003/04 Operating Statement

		Table 4.9  Operating Statement – Changes from Budget 2003

		Table 4.10  2003/04 Revenue by Source

		Table 4.11  2003/04 Expense by Ministry, Program and Agency

		Table 4.12  2003/04 Capital Spending

		Table 4.13  2003/04 Capital Expenditure Projects Greater Than $50 Million

		Table 4.14  2003/04 Provincial Debt

		Table 4.15  2003/04 Statement of Financial Position