Fresh off an election win, the BC Liberals’ first major political and economic challenge has arrived. The BC deficit is quickly heading in the same direction as that of the federal government: significantly upward. Estimates from respected private sector economists are now putting BC’s deficit at between $1.5 and $2 billion, up from the $495 million originally forecasted. The Liberals must now take action to address the growing deficit. A fiscally prudent course would be to trim government spending.

Some, of course, will blame the government for being too optimistic in its budget projections. This was certainly the case for commodity prices such as natural gas, oil, and forest products which impact government revenues from natural resources. Natural resource revenues alone are estimated to account for 9.5 per cent of total revenues this year (2009/10).

Even a slight change in commodity prices can have a big impact on government revenues. For example, the government estimates that every $1 decrease in the price of natural gas (per MMBtu) can reduce revenues – and thus increase the deficit – by $275 to $325 million. While the government projected natural gas prices for 2009 of $5.96, the average price since the budget was delivered has been $4.00.

With respect to economic growth forecasts, the government was rather conservative. In February, the average real economic growth rate estimated by the government’s Economic Forecast Council (12 private sector forecasters consisting of large Canadian banks and research firms) was 0.0 per cent (no economic growth) in 2009. The government, however, actually used a more conservative estimate in formulating the budget, –0.9 per cent growth for 2009.

BC’s economy is now expected to perform even worse than what the government estimated. Updated forecasts by major Canadian banks and research firms predict an average economic contraction of 1.65 per cent this year – nearly twice as negative as the government estimated. Indeed, slower than expected economic activity will result in reduced revenues and a larger fiscal hole.

Naturally, many are wary about returning to deficit budgets after a long battle to wean politicians off them. British Columbians and, indeed, all Canadians have benefited greatly from fiscal prudence through balanced budgets and reductions in government spending (as a percentage of GDP) over the years.

However, the notion that balanced budgets are the be all and end all should be dispelled. Temporary (cyclical) deficits are acceptable as long as spending can be restrained or pared back. If spending is restrained, the budget will eventually return to balance when the economic slump passes.

Most Canadian governments, however, are increasing rather restraining spending, much of it in the name of “temporary” economic stimulus. Unfortunately, a great deal of this “temporary” spending will likely become the baseline for future budgets and result in a permanent increase in government spending in the future.

While the expected 2.4 per cent increase in 2009/10 program spending in BC pales in comparison to many other Canadian governments (federal and provincial), the spending growth will make it more difficult to return to balanced budgets.

BC should follow the lead of other provinces that are actually scaling back their spending. For example, Alberta plans to decrease program spending by 1.8 per cent in 2009/10 while Saskatchewan plans a 0.7 per cent reduction.

Through spending reductions, the BC government will ensure that the budget is returned to balance. In addition, spending reductions would provide the resources to implement tax relief aimed at improving the incentives for investment and entrepreneurship which would help the economy recover sooner.

Despite the rhetoric of activists and media pundits, spending can be reduced without negatively impacting British Columbians. The experience in other countries shows that healthcare, education and other government services could be vastly improved through program reform in spite of spending reductions.

Difficult economic times require difficult decisions. Let’s hope the provincial government follows the lead of BC families and trims its spending.