The economic and revenue projections contained in Budget 2013 received a strong endorsement from Dr. Tim O'Neill, a nationally respected economist hired to review the B.C. government revenue and economic forecasts for the coming budget, Finance Minister Michael de Jong announced today as O'Neill released his report to the public.
A former chief economist at the Bank of Montreal, O'Neill concluded that the Province's economic and revenue expectations are based on sound processes, methodologies, effective use of private-sector outlooks and incorporate prudence through adopting a cautious economic forecast that reflects global uncertainty and risks. The report makes several recommendations, including one significant suggestion on the natural gas price forecast that required a last-minute adjustment to the Province's fiscal plan.
O'Neill noted the government relies on private-sector forecasts of natural gas prices, and those forecasts have regularly missed their targets-resulting in both under- and over-estimated natural resource revenues in recent years. O'Neill recommends that the budget should incorporate a natural gas price outlook at the lower end of the private sector forecasts.
O'Neill concluded that the revenue forecasts in Budget 2013 contain a reasonable level of prudence in areas such as forestry, metals, minerals, income taxes and the economic outlook for B.C. and its key trading partners. The fiscal plan also contains appropriate provisions for contingency spending and a sizable forecast allowance to help protect the overall budget balance.
The report said government has shown sound judgement in its income tax projections over the last five years, on average underestimating revenue streams despite a severe recession and sluggish economic recovery. Given the level of uncertainty that remains in the global economy, it's important to ensure that revenue and growth projections are not overly optimistic, the report said.
A resident of Prince Edward Island who now runs his own consulting company, O'Neill has provided expert economic and forecasting advice to the Canadian government and the governments of Ontario and Nova Scotia.
Finance Minister Michael de Jong -
"Not only did Dr. O'Neill verify the professionalism of the work government staff have done on this budget, he identified a key area where we needed to be a little more conservative in our projections."
"This was a valuable exercise and we're thankful he was able to lend his considerable expertise to this year's budget preparations."
Economic consultant Tim O'Neill -
"Overall I was satisfied with the degree of prudence included in this budget. It's important to avoid excessive optimism in revenue projections when full-scale economic recovery has yet to take hold."
Live transcript of Dr. Tim O'Neills pre-Budget 2013 report. PDF
Consultant Contract. FIN_FEB_2013_ONeill.pdf
Ministry of Finance
FACTSHEETExcerpts from Dr. Tim O'Neill's 2013 report
- "There is ample evidence of professional competence, analytical rigour and appropriate caution applied in the work that goes into producing the revenue projections."
- "The plan to eliminate a deficit requires that a reasonable degree of prudence be embedded in the revenue projections. It is my judgement that such a degree of prudence is evident in the documents I have had an opportunity to examine." "In addition to the explicit prudence embedded in the economic forecast components, there are other cushions to protect the overall budget balance. These are the annual provisions for contingency spending and the sizeable forecast allowance."
- "The Ministry of Energy, Mines and Natural Gas relies on price forecasts from a range of private sector forecasters... There is an apparent tendency in this particular forecast area for the experts to 'chase' prices as they trend up or down. That is, they tend to consistently underestimate future prices as they are steadily rising and to overestimate them as they are falling."
- "I have suggested that... additional prudence be incorporated into the natural gas revenue projections both for the upcoming fiscal year and for the out-years of the planning horizon."
- "There are upside risks to gas prices although those are more in the medium-term. Increased exports via LNG to the rest of the world-especially to Asia where prices are currently five to six times higher than in North America-could generate substantially increased prices and revenues."
- "When negative risks are perceived to dominate, it is wise to shade downward the assumptions that affect revenue growth forecasts. That is currently the situation that virtually all governments are facing during this budget season."
- "Most forecasters underestimated the severity and breadth of the downturn in 2008-09 that caused GDP to be considerably lower globally than expected especially in the advanced economies... This, in turn, caused government revenue projections to be significantly overstated relative to actual outcomes."
Ministry of Finance