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Falcon frets over B.C.'s economic growth

FINANCE Minister Kevin Falcon seems to have suddenly become very nervous.

FINANCE Minister Kevin Falcon seems to have suddenly become very nervous.

Long known for his brash, cocky demeanour, Falcon this week displayed a more muted, cautious attitude when he talked about the province's finances during a presentation he gave on the public accounts of last year's budget.

The reason? Look no further than the ongoing events in places like Greece, Portugal and the United States. The spiralling debt crisis is the latest serious threat to the world economy, and Falcon knows British Columbia could easily be sucked into any global financial meltdown.

That's why his finance ministry is now projecting that B.C.'s economy will only grow by two per cent this year. That's half the growth we experienced last year.

In fact, last year may be as good as it gets for our provincial economy for some time.

No one is predicting that British Columbia - or any other province, for that matter - will achieve four per cent annual growth for the next few years.

This translates into fewer jobs and less revenue for government. That means provincial finances will be squeezed even further in the months and maybe even years ahead.

The financial challenges for government that come with any economic slowdown are compounded by an area of spending that shows no signs of slowing down: the health-care sector.

Health-care spending grew by more than four per cent (or $635 million) last year, and a similar increase will occur this year. But last year the government had more money to play with - revenues were up almost $2.5 billion more than expected because of that unexpected four per cent growth rate.

This year, with slower economic growth, it's unlikely the government will see a greater than anticipated increase in revenue. So health-care spending will continue to squeeze other areas of government spending.

The annual increase in health-care spending alone will soon be more than the annual budgets for all but eight ministries in government (remember, that's just the increase from year to year).

Falcon's other worry is the fate of the HST. If it is rejected in the referendum, it will blow an estimated $3 billion out of government coffers. More than half - $1.6 billion - is transition money that would have to be repaid to Ottawa (the federal government is unlikely to forgive British Columbia that money because it would set an expensive precedent).

The remaining $1.4 billion represents the money expected to be lost over a couple of years after the HST disappears. That's because the HST brings in significantly more revenue to government than the old provincial sales tax.

In fact, the HST was around for just nine months of the last fiscal year (which ended last March 31) and resulted in contributing several hundred million dollars in unanticipated revenue for the government.

By the way, this last point is why I think people are fooling themselves if they think their personal finances will vastly improve if the HST disappears. Falcon says he can deal with that $3-billion hole, but he's signalled one way to soften the blow: revisit the things that were exempt from the PST if we go back to the old tax system.

So don't bet that restaurant meals, to use just one example, will once again being exempt from the PST. Everything is back on the table when it comes to any exemptions, as the government will likely seek ways to boost revenue from the PST and an easy way to do that is to simply make more things taxable.

The potential headaches flowing from getting rid of the HST are one thing, but what really has Falcon spooked are the external events happening around the world.

As we saw in the 2008 recession, no government is immune from the external machinations of the world economy if they are large enough.

Falcon admits that two per cent growth projection for this year may actually prove to be too lofty if things really tank. If that worst-case scenario does indeed occur, Falcon will go from being a nervous finance minister to a panic-stricken one.

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Keith Baldrey is chief political correspondent for Global BC.