Neils Veldhuis | More needs to be done to address B.C.’s debt and tax competitiveness
There are, of course, good economic arguments for spreading the cost of capital spending over time, but that doesn’t mean we should ignore the effect of this type of spending on the government’s fiscal standing in general and its debt levels in particular
It is perhaps a little unfair to use the government’s first quarterly report to evaluate its broader fiscal plan. After all, the government laid out its plan in the 2014 budget and the first quarterly report essentially follows through.
However, with the next provincial budget only four months away and the fact that consultation on priorities will soon begin, now is the time to ask if B.C. is on the right fiscal track.
On this score, the government can do significantly more to create better conditions for individuals, businesses and entrepreneurs who want to work hard, invest and generate jobs and wealth in our province.
Let’s start on the debt front.
When Finance Minister Mike de Jong delivered the budget back in February, much was made of the return to balanced budgets and the small projected surplus of $184 million.
Indeed, de Jong mused that “the greatest gift we can leave our children and grandchildren is a debt-free future.”
The first quarterly report for this fiscal year (2014-15) updated the government’s projections to a fiscal surplus of $266 million ($82 million higher than February’s budget).
Before getting too excited, however, consider that despite forecasting a “balanced” position, the province’s debt is forecast to increase by $2 billion.
What gives?
Because B.C. separates its operating and capital budgets, the operating budget can be balanced while the capital budget can continue to run deficits.
There are, of course, good economic arguments for spreading the cost of capital spending over time, but that doesn’t mean we should ignore the effect of this type of spending on the government’s fiscal standing in general and its debt levels in particular.
While the operating budget may ultimately be in surplus, the government’s rising debt levels warrant concern.
Since 2008-09, B.C.’s net debt has grown from $26.2 billion (or 12.8% of GDP) to $40.8 billion (17.4% of GDP).
The rapid accumulation of debt threatens the sustainability of government finances given the potential for increased interest payments and amortization expenses, which could prompt reduced spending, tax increases and/or more borrowing.
In addition to the growing debt, the B.C. government has maintained the recent trend of diminished tax competitiveness in the province.
In the 2012 budget, the Liberals proposed a “temporary, one percentage-point increase in the general corporate income tax rate in 2014-15” to help balance the budget. Ultimately, the government fast-tracked the tax increase to April 1, 2013.
The Liberals also “temporarily” increased the top personal income tax rate from 14.7% to 16.8% – a level that is now 68% higher than Alberta’s top rate of 10%.
No effort has thus far been made to expedite the removal of these “temporary” measures.
Finally, the government has not put forth any ideas about offsetting the marked increase in business taxes associated with the reintroduction of the PST.
Indeed, the government’s own Expert Panel on Business Taxation recommended that the government introduce a refundable investment tax credit equal to the PST paid on machinery and equipment.
Without a competitive tax system, B.C. risks losing much-needed investment and skilled workers that will instead gravitate to provinces and U.S. states with more competitive tax policies.
We agree with Minister de Jong that balancing the budgets and reducing the debt burden are critically important, but significantly more needs to be done to ensure British Columbia is on the right fiscal track. •
Niels Veldhuis (@nielsveldhuis) is an economist and president of the Fraser Institute. This column was co-written by Sean Speer, the institute’s associate director of government budgets and fiscal policy. Head to Head runs monthly.Jim Sinclair | A steady diet of tax and service cuts is draining the life out of the economy
The steady decline in service levels raises serious questions about the real deficits that exist in our province
B.C.'s finance minister is having a tough time these days trying to explain the province’s fiscal status. When Mike de Jong took to the podium at the legislature’s press gallery to give his latest quarterly update on B.C.’s finances, he had more than a room full of questions to answer. For example, did a greater-than-expected surplus indicate that things were on track, or was it simply a symptom of the budget making vagaries that shed little if any light on what makes our economy tick?
But more to the point, even if the indicated surplus is better than expected, is it a result of sound policy choices? On both points it’s fair to say that B.C.’s fiscal and economic status is far from meeting its potential, a point that does not bode well for sound and stable growth in the future.
To hear the finance minister tell it, the September results were vindication that he was on the right track. Slow and steady fiscal management was well in hand, according to the minister, and no course correction was needed.
However, ignored in that rationale are some very uncomfortable facts. Employment growth in B.C. has been anemic at best; for the first half of this year it has averaged 0.6%, about half the growth rate of the four western provinces. The poor showing on the employment front is also at odds with the government’s stated commitment in its two-year-old jobs plan, a plan that was going to kick-start growth and open the door wider to high-skill-high-wage opportunities. So far that plan has produced more in the way of glossy posters than real opportunities for B.C. citizens.
Another uncomfortable fact is that the current “better than expected” surplus says more about what the provincial government is not doing than anything else. To put it more bluntly, the current surplus has more to do with cuts to services than with improving economic prospects. Whether it’s direct government services, health care, education, regional infrastructure or Crown corporations, the trend line across all of them has been to squeeze already lean service levels even more.
In the area of direct government services, for example, B.C. already had one of the leanest public sectors in Canada. Successive rounds of so-called belt tightening over the last decade and a half have significantly reduced provincial staffing levels. It’s no coincidence that when staffing levels get cut that much, government’s capacity to provide effective oversight and stewardship falls well short of what’s needed; just ask the citizens of Likely how reduced oversight and stewardship has affected their community.
The steady decline in service levels raises serious questions about the real deficits that exist in our province and the degree to which the current fiscal strategy is building the capacity to tackle those deficits. In health care, for example, we know that an aging population will mean greater demands on our health system, yet flat-line budgets for health authorities are central to the current fiscal strategy. In B.C.’s K-12 education system, we see that continued under-funding not only undermines learning for our kids, it also leads to court rulings against the government and protracted labour disputes with teachers. In post-secondary, a growing skills gap will require greater investments in our colleges and universities, yet real per-student funding of those public institutions will have dropped by 20% since 2001 based on the 2014 fiscal plan.
Rather than pretend that “stay the course” is the appropriate way to manage B.C.’s finances in the months and years ahead, it’s time the finance minister and his provincial colleagues had a serious rethink of how best to manage the provincial economy.
Let’s start by recognizing that tax revenue and tax fairness are cornerstones to sensible and sustainable economic growth. A modern and diverse economy like ours cannot sustain itself on a steady diet of tax cuts and lower services to citizens.
It’s time to build a fiscal plan based on the needs of people and regions, not blind adherence to the concept that tax cuts and lean government services will somehow pay for themselves.
The latest evidence tells us that plan isn’t working. So let’s come up with a plan that does. •
Jim Sinclair ([email protected]) is president of the British Columbia Federation of Labour.
