Finance Minister Mike de Jong said Thursday the government is sticking to its plan to balance the books and the shortfall will be made up with a new round of restraint.
The decline in natural gas revenue means the government will have to find $1.1 billion over the next three years elsewhere, de Jong told reporters.
"I'm not in any way diminishing the magnitude of the challenge that we face, coupled with a desire we have as a government to address issues relating to family affordability," he said. "So that challenge just got even more difficult."
De Jong said the natural gas revenue declines will squeeze the government's room to manoeuvre, particularly when heading into a spring election.
This year's budget deficit forecast, originally projected at $968 million, has been revised upward to $1.1 billion, an increase of $173 million.
De Jong said the government plans to make up the revenue loss through spending cuts, hiring freezes and a review of its current negotiating mandate with thousands of public servants.
More than 27,000 B.C. Government and Service Employees Union workers recently staged a one-day strike to back their demands for more money from the government.
De Jong said the government is committed to stick to its own law that calls for a balanced budget in 2013-14, but "it's not going to be easy."
He pointed to a Finance Ministry graphic that outlined the rise and fall of natural gas prices in recent years.
The graph showed the price of natural gas, measured in gigajoules, was $6.33 in 2008, but dropped to $2.15 this year.
Materials provided by the Finance Ministry during de Jong's quarterly update stated that every 50-cent change in the price of natural gas, equals revenue changes of plus or minus $72 million to $110 million.
"The prediction of natural gas revenues for the three years covered by the fiscal plan was $1.9 billion," said de Jong. "In this update, that is reduced by $1.1 billion."
He described the volatility of natural gas prices as a revolving state of good, bad and ugly.
"I hesitate in any way to suggest there's a silver lining," de Jong said. "The only one I can think of is we're almost at a point where it is difficult to imagine gas prices dropping any further."
He said the government's cuts, reductions and freezes to offset the natural gas royalty reductions are estimated to be $241 million this year, $389 million next year and $248 million in the 2014-15 budget year.
"We are resolved to do everything humanly possible to meet our commitment and show our respect to taxpayers that goes with not spending more of their money than we have," said de Jong.
Opposition New Democrat finance critic Bruce Ralston said the government's budget was based on a flawed assumption of higher natural gas prices.
"They gambled on a price on natural gas and now that that hasn't happened they are going to have to introduce at least on one side of the equation austerity measures." he said.
Ralston predicted the Liberals will be forced next year to introduce amended legislation that allows the government to table a deficit budget.
But De Jong said the government was firmly committed to meet its budget targets before what he called the "spring shareholders meeting (the May election)."
He suggested unionized government workers should not bank on wage increases.
"There's clearly no additional money available," de Jong said.
BCGEU President Darryl Walker said he didn't want to fully address de Jong's comments until the union has officially heard from the government.
"If we're going to have some kind of freeze, that means our members once again — people aren't going to be replaced — we're going to be doing more with less," he said. "I couldn't possibly comment today on what we're willing to do or where we're willing to go until we see that mandate."
The B.C. Chamber of Commerce said it supported the government's "responsible approach" to getting back to a balanced budget.
"Our members recognize that these figures are a result of a weak global economy and slumping natural gas prices which have created a situation where B.C.'s resource revenues are significantly down from projections," said chamber president John Winter in a news release.