You constantly hear the warning from macro-economic thinkers about the dangers of not having a diversified economy.
Something about eggs and a single basket.
The fiscal update provided by Finance Minister Mike de Jong this week is positively glowing with good news on most fronts. But B.C. is making inordinate amounts of cash from real-estate sales, to the point where it’s leaving other revenue streams behind. It’s not as if the Finance Ministry is counting on it. The projections on the tax have been consistently conservative over the past few years. But each year of the boom, the tax produces hundreds of millions more than expected.
This week’s update follows the same pattern. The February budget projected $333 million in revenue from the tax in the first fiscal quarter. It brought in $633 million. The full-year estimate in February was $1.23 billion. The new estimate is $2.2 billion. That’s an additional $965 million in revenue.
The government could collect more in an unplanned real-estate windfall than it will take from the entire forest industry ($900 million).
The property-transfer tax would rake in almost as much as natural-gas royalties, forest revenue, the Columbia River Treaty, water rental and the mining and energy ministries combined.
The revenue estimate is bulked up by the 15 per cent tax imposed on foreign buyers of Metro Vancouver real estate in August. The update estimates that the surtax will produce $165 million in extra revenue over eight months of the fiscal year. The full-year impact of the foreign-buyers tax is estimated at $255 million.
Premier Christy Clark and de Jong stressed during the introduction of that tax that it was designed to curb the market, not make money. De Jong said again this week: “Part of the rationale was to reduce the amount of property purchase tax the government takes in.”
Nonetheless, the market climbed so high that the money keeps piling in. It puts the government in the position of potentially making a quarter-billion dollars over a year without even trying.
Another warning you hear constantly is that “it can’t last.”
That one is starting to look valid. There are multiple reports the market started to slow down this summer, and many expect the foreign-buyers tax has curbed it further, although there’s not much definitive.
De Jong will release the first hard numbers on the tax early next week, but they will be hard to interpret. The two weeks of intense publicity before the tax took effect created a stampede in late July to beat the Aug. 2 imposition.
So the August figures will likely be anomalous. Even after two or three months of data, it will be hard to compare foreign buyers before and after the tax, because disclosing citizenship of real-estate buyers only became mandatory in June. Did the tax do what it was designed to do? It’s going to be a difficult question to answer.
In the meantime, the property-transfer tax has delivered another boatload of extra money to the government. If you take the windfall out of the picture, B.C.’s books would still be in good shape.
But there wouldn’t be nearly enough money to cancel an MSP increase (forgoing $107 million a year); spend $500 million on housing, starting next week and bulk up the Prosperity Fund by $400 million.
De Jong is the first to acknowledge you can’t count on it indefinitely. “We’ve seen governments find themselves in great difficulty by assuming revenue generated in one years will continue to be generated in perpetuity.”
There’s a standing example of that in the fiscal update. Natural-gas royalties used to bring in hundreds of millions. From April to June this year, B.C. collected a grand total of $2 million.
The government seems cautious about budgeting real-estate revenue to fund routine on-going functions. But they’re carefree about using all the money currently rolling in to embark on pre-election ventures.
The rolling three-year plan was updated this week and the ever-conservative forecast is for property-transfer tax revenue to drop by $400 million in the next fiscal year, and another $100 million the year after.
Maybe this time they’ll be right.
