B.C. government finances are set for the largest deficit on record this year as COVID-19 and required efforts to stem the health crisis ravage revenues and boost expenses.
Under the government’s baseline scenario, B.C.’s potential deficit hits a record $12.5 billion. In February, Budget 2020 had the surplus pegged at $227 million, highlighting the unprecedented effects of COVID19. This may be the largest deficit, both in nominal terms and as share of gross domestic product, going back to at least fiscal year 1981-82.
While this potential deficit is larger and deeper than we expect, it is not entirely a surprise given the state of the economy due to COVID-19 and pandemic response measures.
Provincially, pandemic response measures cost $5 billion, with large outlays allocated to programs including the B.C. Emergency Benefit for Workers, health and mental health services and temporary rental supplement. This amount also includes $1.5 billion for the recovery phase.
Revenues are also expected to plunge by $6.3 billion due to COVID-19, with personal income tax, corporate income tax, the PST and property transfer taxes accounting for a more than $3.5 billion hit.
Underpinning the fiscal scenario are relatively conservative but prudent economic planning assumptions. This includes a near record GDP contraction of 6.8% for 2020, which is consistent with Central 1’s outlook, albeit with higher average unemployment (11.3%) and weaker expectations for consumer spending and housing. Growth for 2021 is also assumed to be 3.1%, which would mark a soft rebound. There are both upside and downside risks that depend on the evolution of the pandemic.
It is prudent to expect multiple years of deficits, although the magnitude will decline as the economy recovers and governments control costs. That said, the economy is unlikely to fully recover until 2022 as physical distancing measures will likely persist, constraining operational capacity, sectors like tourism remain weak and global growth remains soft. Tax revenues will follow suit.
B.C. home sales rebounded in June alongside markets across the country as buyers returned to the market following a pandemic driven hiatus. Multiple Listing Service sales surged 70.6% in June, following a 31% increase in May. At about 6,160 units, seasonally adjusted sales have recovered to about 92% of February pre-pandemic levels.
June sales growth was observed across the province. Sales nearly doubled in the Fraser Valley Real Estate Board area and Chilliwack. Vancouver Island sales rose close to 80%, while gains were relatively modest in the Thompson-Okanagan and northern B.C.
Various factors have contributed to a firmer footing for sales. A delayed spring market, due to health fears and mobility restrictions, and sharp job loss likely triggered a release of pent-up demand amid the economic reopening phase. Declining mortgage rates were supportive, and the announcement of tighter mortgage insurance requirement by the Canada Mortgage and Housing Corp., effective July 1, likely pulled forward sales.
Higher demand and low inventory lifted the average price by 5.3% month-to month and 9.8% year-over-year to a seasonally adjusted $752,779. The sales-to-active-listings ratio jumped to 21%, which is in line with a seller’s market and consistent with anecdotal evidence of multiple offers and rising prices. Ratios on Vancouver Island are close to 30%, with levels near 20% in the Lower Mainland. Benchmark home prices rose 0.1% in the Lower Mainland and Victoria, and 0.7% on Vancouver Island (excluding Victoria), and 0.9% in the Okanagan.
Strength in the housing market remains surprising given a weak economy. We remain of the view that home sales will soften in coming months as temporary drivers retreat.
Bryan Yu is deputy chief economist at Central 1 Credit Union.