THE 2009 BRITISH COLUMBIA BUDGET TD Economics

Interesting TD Economics article by Pascal Gauthier with a focus on British Columbia. Enjoy!

HIGHLIGHTS

• After a small $50 million surplus in fiscal year (FY) 2008-09, planning deficits are estimated at $495 million in FY 2009-10 and $245 million in FY 2010-11
• Return to balanced budget by FY 2011-12, with the help of cost savings worth $1.9 billion over 3 years
• No forecast allowance, but prudent growth forecasts and contingency amounts
• $9 out of every $10 in new spending towards health care
• Few new tax measures, back-end loaded to FY 2011-12
• Capital spending in infrastructure ramped up significantly (+ $14 billion)

British Columbia is feeling the pinch from the severe ongoing global recession, like every other region in the country. Compared to last September’s quarterly fiscal update, downward revisions to growth forecasts by the private sector have translated into a massive revenue shortfall of $6.6 billion over the Province’s 3-year fiscal planning horizon. As a result, for the first time in six years, the province is faced with a deficit. However, the deficits are expected to be modest both in absolute size (cumulating to $740 million over two years) and relative to the size of the economy (at 0.2% of nominal GDP in fiscal year 2009-10). The government has chosen not to include a forecast allowance as in previous years. However, in order to mitigate risks to its projections, it will use economic growth forecasts significantly below the private-sector consensus, and contingency amounts of $250 million to $385 million per year.

Economic and Revenue Outlook

The private-sector consensus forecast for real GDP growth calls for no growth (0.0%) in 2009. Akin to the prudent approach taken by the Federal Finance Department, B.C. Finance is playing it safe by using a forecast significantly below the private-sector average. Their assumption is for a contraction of real GDP of 0.9% this year, which is very close to our own call for a contraction of 1.0%. When compared to the Budget 2008 plan, the downward adjustment to revenue projections is broadly based, but most badly hit are own-source revenues in the form of resource royalties, corporate income taxes, and property transfer taxes. Similarly, but with a lesser difference, their real GDP growth forecast of 2.4% for 2010 lies below the private-sector forecast of 2.8%. Our own forecast for next year is more bullish and suggests some upside risk vis-à-vis their projection, with the main difference hinging mostly on the projected direct and indirect boost to growth from hosting the 2010 Winter Olympics.

Spending measures

Savings worth $1.9 billion over the 3-year planning horizon are being targeted, $250 million of which are yet to be identified. Administrative spending will be put under the microscope, while the number of senior executives in government will be slashed by 20% and no additional planned wage increases are being budgeted for upcoming rounds of public sector negotiations. The expected savings are being recycled towards key spending areas, but mostly health care. In fact, $4.8 billion, or 90% of all additional spending, is slated for health care. The remainder of additional spending will go to education, social services, safety, communities, and the environment.

Very much in line with a theme omnipresent in the Federal Budget and very likely to show up in other upcoming provincial Budgets, infrastructure spending is being ramped up significantly – to the tune of $14 billion over 3 years. Of this amount, $10.6 billion is for approved projects within the Province’s capital expenditure plan, while $2 billion is provided on a cost-shared basis with the Federal government, and the remaining $1.4 billion is for local infrastructure in partnership with the Federal and local governments.

Tax measures

The very few new tax measures introduced were understandably back-end loaded to FY 2011-12 and beyond. As announced in November, a 2-year property tax deferment program is being introduced. The B.C. Mining Flow-Through Share (non-refundable) Tax Credit is being extended by one year to the end of 2009. Expiry dates for film tax credits are being eliminated, while the credits themselves will be made available to other Canadian (non-B.C.-based) companies. Furthermore, starting in FY 2011-12,

The industrial property tax credit will increase from 50% to 60%, saving mills, mines, and other industrial employers $11 million per year. This tax relief will be funded from carbon tax revenues (intended to be revenue-neutral).

The Low Income Climate Action Tax Credit will increase by 10%, representing foregone revenue of $15 million per year.

A Northern and Rural homeowner benefit increase of $200/year, also funded by carbon tax revenues.

The farm land school property tax will decrease by 50%.
Bottom line

Faced with such a U-turn in economic fortunes in a short amount of time, the government has elected to modify its balanced budget legislation to allow for a cyclical deficit. Not having done so, and forcing taxes hikes and/or more drastic spending cuts could have meant exacerbating the recession. In the current context, leaning against this recession, along with other governments, and allowing a modest deficit while ramping up capital spending seems appropriate. As a result of these deficits and additional capital spending, the (taxpayer-supported) debt-to-GDP ratio will end up 2 percentage points (from 13.8% in FY 2008-09 to 15.8% in FY 2011-12) higher by the time a balanced budget is within reach. This would still lie below the 16.1% level recorded in FY 2005-06 and leave the province in a healthy fiscal position once the economic recovery has taken hold.

Pascal Gauthier, Economist
416-944-5730

Lynchism Gem: Ignore the headlines

Famed Money Manager Peter Lynch is perhaps best known for his timeless wisdom that you can beat the pros by focusing on stocks of companies where you either work or shop or have some other edge. But a more relevant Lynchism today is this gem: Ignore the headlines.

It’s not that easy thing to do, every water cooler and dinner table has endless chatter on recession, housing, subprime woes, the credit crunch, Overpaid CEO’s and soaring energy costs.

Makes you want to sit on your thumbs and wait it all out before making any big moves. But what exactly are you waiting for???

Rarely has there been a moment in time that you couldn’t scare yourself into doing nothing. And yet, as Lynch observed nearly 20 years ago, “in spite of all the great and minor calamities that have occurred…all the thousands of reasons that the world might be coming to and end-owning stocks has continued to be twice as rewarding as owing bonds” The top reason not to buy stocks, in Lynch’s view, is if you don’t already own a home-in which case, that should be your first investment. An owner occupied home is nearly always profitable.

Warren Buffet the Oracle of Omaha has recently been quoted to be actively perusing US Stock and companies with his personal account. “Be Fearful when others are Greedy, and be greedy when others are fearful.”

The Fundamentals of the economy especially in British Columbia are very strong. If you are needing to retire and have lived your whole like in Winnipeg and have enough to live well in BC would you not leave the winter behind, if you want to use your RRSP’s and the Canadian Medicare then your California of Canada is right here in the Lower Mainland!

 

Here is a great article in the Vancouver Sun echoing these ideals

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B.C. in better position than most to weather financial storm

Derrick Penner

Vancouver Sun

Monday, October 20, 2008

 

VANCOUVER — On the bright side, British Columbia is heading into a period of economic uncertainty with a provincial budget that is in good shape and an economy that is performing well, according to the  Institute of Chartered Accountants in B.C. (ICABC).

However, the B.C. economy is not doing so well when it comes to the competitiveness and productivity of its workforce, the ICABC said in its annual Check Up B.C. report, an assessment of provincial economic performance. B.C.’s labour-force productivity increased by 1.3 per cent between 2002 and 2007, the report said, which lagged the national average of 4.5 per cent.

“At this time of uncertainty, it is imperative that government continues to be conservative in their economic forecasts and considers all policy tools at its disposal to stimulate investment, boost productivity and maintain sound fiscal management,” Richard Rees, CEO of the ICABC.

Rees added that the no one knows what the impact of the current financial crisis will be, and while “many British Columbians stand to lose a great deal,” the province’s economy is “in a better position than many of our competitors to weather some of the challenges.”

The Check Up report measures factors in three general areas: quality of life, work and investment, mostly how these factors performed over 2007.

On the work side, the ICABC noted that B.C. reported a record low unemployment rate of 4.2 per cent in 2007, a year that saw 70,800 new jobs created.

However, in 2008 the job market has softened, the ICABC added, with only 500 net new jobs created in August and an unemployment rate that has risen to 4.6 per cent.

“Already many resource-dependent communities are feeling the effects of reduced consumer demand and lagging commodities markets, and our forest industry continues to stagnate,” Rees said.

“But we are fortunate in B.C. that the provincial government has done a good job creating a sound economic environment.”

© Vancouver Sun 2008

How a lender looks at a Mortgage Application

Everyone always seems to be quite curious when it comes to the mortgage application, how do the Blue power suits come up with what a ‘good’ application is? and were does my application stack up to this standard?
Just think about how you would feel if someone was to ask you for a loan. You would consider how long you have known them, are they punctual, do they move around a lot -good with there obligations, do they live within there means….. What you are doing is creating a picture of how likely you will see your hard earned money again! Lenders call this the Five C’s of credit. Today I would like to talk about what each of these components mean and how it is my job to position your application in the best of light to the lenders.

 

Character is the general impression you make on the potential lender. Imagine if you were lending money to a friend, how well you think that they will be willing to repay the loan thinks like your educational background and experience in business will be reviewed. The length of time at your current employment and your current residence will be considered. The longer you have been at both, the higher you will score on the character scale. One important thing to note is that with the large percentage of Lower Mainland residents that are now self employed, if you worked in the same business for several years as an employee and now you are business for self, Genworth and CMHC have programs that will look at your previous employment background, as most traditional institutions require 2-3 years as business for self.

 

Collateral is what the loan is secured upon; Mortgages are a part of the banks Real Estate Secured Lending department. In real estate transactions this generally means the property that you are looking to purchase or a property you are using as collateral (such as a Home Equity Line Of Credit). If for some reason, you cannot repay the mortgage, the bank wants to know that the real estate the mortgage was taken out for is good and marketable real estate. A real estate appraisal will determine the value for the property in today’s market. The appraisal will also indicate to the lender the type of property being financed and any deficiencies that may affect the ability to re-sell, in case of default. A property that is located in a North Vancouver is considered a better risk than a farm in rural parts of the Province. Simply, there are more buyers for the home in the city than for a rural farm and therefore is easier to re-sell.
Capital is the money you personally have invested in the purchase, otherwise known as your down payment. The more of your own money you invest as a down payment, the more likely that you will do all you can to maintain your payment obligations. Banks want to see a vested interest in the property that you are acquiring; this is why rates and insurance premiums are generally higher for a rental property as it is not occupied by the purchaser who is comfortably living in another location. Capital is also reflected by your ability and willingness to save money and accumulate assets. The higher your net worth, the more you have as a cushion for repayment in the event you run into a financial set-back.
Credit is the evaluation of your habits in performing credit obligations. The information about your credit history is stored at the “credit bureau” and indicates how well you paid your bills over the last 6 years. All major credit cards, auto loans, leases etc. are reported to the credit bureau. A lender will evaluate your ability to maintain your obligations and try and determine how well you live within your means. Some individuals make the mistake of not paying the minimum monthly obligations on loans and credit cards with the expectation of making a larger payment the following month. These missed payments appear on their credit report branding them as chronic “late-payers” for the next 6 years. In Canada we use an empirical system of your score which is called the Beacon score, in the US it is referred to as a FICO score, they are on a scale from 400-900 the higher your score the more favorable your application will be.  

Capacity to repay the loan is probably the most critical of the five factors. The lender will want to know exactly how you intend to repay the loan. The lender will consider your income as it relates to the loan that you are applying for. Does the monthly carrying costs of the loan represent less than or equal to 32% of your total monthly income? If it is, the probability of you successfully repaying the loan is fairly high. Prospective lenders will also want to know about any other sources of income you may have to repay the loan, if your steady income stream is interrupted. Some of the institutions such as TD Canada Trust allow you to use rental income to offset this obligation, either directly or as supplemental income, please send me a email if you have any questions regarding this policy, it is a important tool that can make or break a transaction.