The B.C. government continues to spend gargantuan amounts of money, but the source of much of that money is steadily drying up.
As a result, the B.C. Liberals face some stark choices: forget balancing the budget, cut spending or raise taxes.
On the spending side, most of the cost pressures are in four areas that are basically off-limits when it comes to cutting: health care, education, social services and public safety. Those areas consume about 80 per cent of all government spending.
So the focus may shift to the revenue side of the ledger, and Finance Minister Kevin Falcon's latest fiscal update - his second quarterly financial report - contained some bleak news on this front, both for now and the near future.
Of particular concern is the continuing decline in revenue from natural gas royalties. For years, this one line item was a proven windfall for B.C. government finances.
High demand for our gas drove up prices. The gas industry paid enormous sums of money for exploration rights. The result was more than $1.5 billion a year flowing the government's way year in and year out.
But today, it's a much bleaker picture. The decline began in 2009, but Falcon had hoped for a modest rebound from last year's meagre total of $313 million.
He's not going to get it, as the original forecast of $447 million has been downgraded to just $381 million.
His three-year fiscal plan shows he's banking on significant and steady growth in revenues from natural gas. But there's a glut of natural gas on the market and low demand for it from the U.S.
If things don't improve fast (and there's no evidence they will), the plan will be short about a half-billion dollars from this one area of revenue alone.
In fact, revenue from natural resources overall has taken a beating and is expected to be $215 million less than what was expected for the entire year.
Again, Falcon is projecting to collect an additional $700 million or so on this front in the next two years.
If his plan can't meet its targets in this area - which is controlled by external forces more so than in most other areas of the budget - it will put enormous pressure on other ways the government collects money.
For example, the B.C. Liberals (and New Democrats before them) have treated Crown
corporations like B.C. Hydro and ICBC as cash cows. The government expects to extract almost $2 billion from B.C. Hydro from this year and the next two years at a time when B.C. Hydro is being told to cut costs and delay almost $1 billion in maintenance and construction.
Provincial auditor-general John Doyle has already blown the whistle on B.C.
Hydro's insatiable appetite for "deferring" expenses, so it will be interesting to see how he views the government's plans to further dip its hand into the energy corporation's cookie jar.
When it comes to ICBC, the government has already lost the $290 million it was hoping to take from the auto insurance monopoly.
A combination of higher-than-expected claims and some staggering losses in ICBC's investment portfolio wiped out that dividend. But the B.C. government is also anticipating taking an additional $500 million from ICBC over the next two years.
The prospect of that being realized seems a bit dicey, given the continued exposure of ICBC's investment fund to the same world economic problems plaguing everyone else's RRSPs.
This all adds up to some very bad numbers for Falcon, and suggests the likelihood of balancing the budget without extensively cutting vitally needed government services is almost impossible.
But the government has to make some progress in at least significantly reducing the current deficit of $3.1 billion.
And since cutting health care or education spending is political suicide, the debate may provide an excellent opportunity for Premier Christy Clark to show everyone she's no Gordon Campbell.
In other words, her government can raise taxes.
An increase in corporate taxes (even if it's a modest one) would likely be popular with the public, even though the business community would no doubt squawk.
But with the world economic problems rocking the B.C. government's revenue projections, such an increase may be the only option.
Keith Baldrey is chief political reporter for Global B.C.
