Harvey Enchin: A dour budget for grim economic times.
The backdrop to the tax hikes and debt increases in Tuesday’s budget are weak provincial, national and global economies. Forecasts of economic growth in British Columbia in 2012 have been scaled back from the “prudent” estimates in last year’s budget to 1.8 per cent this year, 2.2 per cent in 2013 and 2.5 per cent a year for the next three years. In 2011, the budget expected growth to average 2.8 per cent a year in the final three years of the forecast period.
The budget’s figures are slightly below those presented by the Economic Forecast Council, the group of 14 economists the government consults as part of its budget preparation. Finance Minister Kevin Falcon said the difference between the budget and the Council’s forecast — on average about 0.2 percentage points — represents $ 500 million in the fiscal plan. “Prudence is important in an uncertain world,” he told a media briefing.
And uncertain it is. Risks to the economic forecasts include the spreading of the sovereign debt crisis from Greece to the larger economies of Italy and Spain, the possible return of recession in the United States, weaker demand for B. C. exports as a result of moderating growth in China and increased currency volatility. Forecasts for the Canadian dollar over the next five years range from 92 cents US to $ 1.05 US. Europe has entered recession, bond yields in Spain and Italy have reached levels at which Ireland and Portugal sought international aid, and Austria and France have joined the club of troubled economies. Only four of 17 eurozone member states now hold AAA ratings from Standard & Poor’s.
Despite recent improvements in the U. S. economy, the recovery is expected to slow as the federal and state governments impose restraint and exports to Europe decline. The job outlook remains bleak, notwithstanding strong monthly job creation numbers ( 243,000 in January), with the unemployment rate last month at 8.3 per cent. Real U. S. GDP is expected to grow by 2.2 per cent this year.
Because of B. C.’ s expanding trade with Asia, it is less vulnerable to U. S. economic weakness than other provinces or Canada overall. Only 42.7 per cent of B. C.’ s export goods are destined for the U. S., compared with 77.8 per cent for Canada and 86.7 per cent for Alberta.
This may turn out to be little comfort, however, as China’s economy is cooling. Chinese GDP grew 10.4 per cent in 2010, 9.2 per cent in 2011 and is expected to expand by eight per cent this year, a rate of growth some analysts say China needs just to stand still.
In order to realize the budget’s material assumption of real GDP growth of 1.8 per cent this year, 2.2 per cent next year and 2.5 per cent in 2014- 15, B. C. needs to see a pickup in consumer spending but — at an estimated 1.8 per cent for 2011 — it lags other provinces in retail sales growth. The budget blames slow employment growth, heavy debt loads and falling consumer confidence for this lacklustre performance but offers no reason why it projects robust retail sales growth of 3.5 per cent in 2012 and in 2013, and four per cent in each year from 2014 to 2016.
Given that the unemployment rate is expected to be 7.5 per cent in 2012, 7.3 per cent in 2013 and an average of 7.1 per cent over the medium term, and with household debt at nearly 160 per cent of disposable income, a resurgence of consumer confidence and spending would seem unlikely.
Falcon said his government is not planning for a “V” shaped economic recovery. “Others can be more optimistic,” he said, “we are not going to be.”
In fact, a dismal discussion of a balance sheet recession, as opposed to inventory- based recession, graces the back of the budget book — from which a recovery is more commonly “U” shaped; or worse “L” shaped, suggesting years of little or no growth. Indeed, one scenario foresees the U. S. never returning to its pre- recession output growth.
A recovery from an inventory-based recession tends to bring the economy back to pre- recession levels within six month to two years; a balance sheet recession ( one caused by the collapse of an asset bubble) is followed by a decade or more of slow or stagnant economic activity.
Falcon’s dour budget reflects a grim global economic outlook. It will make no one happy.