Economist says B.C. budget numbers OK, but natural gas projections too high

VICTORIA – Finance Minister Mike de Jong says hiring a former Bank of Montreal chief economist to fact check British Columbia’s budget forced him to revise his bottom line downwards, but Tuesday’s budget still achieves its balanced target.

Government-hired economist Tim O’Neill recommended dropping the budget’s natural gas estimates by $70 million.

De Jong would not confirm how much he ended up cutting from the budget following O’Neill’s report, but he was not disputing the $70 million after rejigging natural gas projections.

“It wasn’t merely an exercise in rubber-stamp validation,” he said. “When I became aware of the concern he enunciated, we had to move quickly because it has a material impact on the budget and some of the decisions we were making.”

O’Neill’s 22-page report, released a day before de Jong tables the Liberal government’s pre-election budget, called for additional prudence for natural-gas revenue projections for this year’s budget and for the following two years.

“My suggestion was that they reduce the revenue price forecast for natural gas, and as a consequence that would end up lowering the projected revenues from that area,” O’Neill said at a press conference.

The report said B.C.’s natural gas revenue projections have been overstated in five of the last eight years, and O’Neill suggested extra caution is needed when factoring those revenues, especially since natural gas prices are at record lows.

“Given the persistent over estimation of natural gas revenues in recent years and the material negative impact on total revenue expectations, it would be wise for the budget to incorporate price forecasts closer to the lower bound of the private sector forecast range than is contemplated in the projections that were reviewed,” said the report.

O’Neill’s report recommended the budget base its natural-gas revenue projections on a price that ranges between $1.80 and $1.90 a gigajoule.

O’Neill’s report said if the government based its natural-gas revenue projections on a price at $1.85, that would lower the Finance Ministry’s budget estimate numbers between $60 million and $70 million.

A government source said last week the Finance Ministry had revised its budget numbers after receiving O’Neill’s report. The source would not say how deeply it cut into its original revenue projections.

Last September, de Jong said declining natural gas revenues had blown a hole in the government’s budget plans.

He said the three-year revenue forecast for natural gas revenue was $1.9 billion, but price drops cut that estimate by $1.1 billion. De Jong said the price for natural gas was $6.33 a gigajoule in 2008, but dropped to $2.15 this year.

Materials provided by the Finance Ministry during de Jong’s quarterly update last September stated that every 50-cent change in the price of natural gas equals revenue changes of plus or minus $72 million to $110 million.

O’Neill’s report said overestimating natural gas revenues can have impacts on the budget bottom lines in the hundreds of millions of dollars, which caused him to call on the Finance Ministry to dial down its estimates for the projected returns of the volatile commodity.

“Natural gas revenues have been over projected in five of the last eight years and the average size of these negative variances is substantial,” said the report. “That is a key reason for my suggesting that the forecast for natural gas revenues be shaded down further in the upcoming budget.”

The report came just a week after the Liberal government’s throne speech predicted B.C. could reap at least $100 billion in revenues generated by exports of liquefied natural gas over the next 30 years.

As for the general budget projections, O’Neill’s report found everything pretty much in order.

“I have concluded that there are no glaring problems or inadequacies that need to be addressed,” the report states.

But Opposition New Democrat finance critic Bruce Ralston said the report did not examine government expenditures and does not answer the key question on whether or not the budget is balanced.

The B.C. election is set for May 14.