Bad news budget dims New Brunswick's economic prospects

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Appeared in the New Brunswick Telegraph Journal

Last week’s provincial budget was a heap of bad news for New Brunswickers. First they learned that they will continue to be burdened by a government with shaky finances driven by annual deficits and mushrooming debt. Topping that off, Progressive Conservative Finance Minister Blaine Higgs proposed a series of highly damaging tax increases as a way out of New Brunswick’s deep fiscal hole. Unfortunately, these tax hikes will cast a dark cloud over New Brunswick’s economic prospects and likely bring little revenue in return.

It’s hard to deny that New Brunswick’s finances are in a dire state. The province has splashed red ink every year since 2008/09 and Minister Higgs pegs this year’s deficit at $479 million or 1.4 per cent of provincial gross domestic product (GDP). With the provincial government persistently spending beyond its means, New Brunswick’s net debt (financial liabilities minus assets) is set to dramatically increase from a recent low of $6.7 billion in 2006/07 (25.4 per cent of GDP) to $11.6 billion in 2013/14 (34.2 per cent).

And the growing debt burden has no end in sight. Minister Higgs expects deficits to continue until at least 2015/16 without a firm commitment to a balanced budget target date—this despite his newly minted tax increases.

More bad news: Higgs’ plan to tackle the deficit through tax increases does not have a strong track record. International research clearly shows that successful deficit slayers rely more heavily on spending reductions than tax increases. Canada’s own history in the 1990s with federal and provincial deficit elimination shows that governments must boldly and swiftly attack the spending side of the ledger to balance the books.

What’s worse is that Minister Higgs has chosen to increase some of the most economically damaging types of taxes: personal and corporate income taxes. Economic research consistently finds that personal and corporate income taxes impose among the highest costs in terms of reduced economic growth because they have a greater adverse effect on people’s decisions to work, save, invest, and be entrepreneurial.

As of July 1st all four of New Brunswick’s personal income tax rates will increase. The percentage increases are greatest for the top three tax brackets which will increase by an average of 26.8 per cent. Specifically, the top provincial rate will go to 17.8 per cent from 14.3 per cent (add the top federal rate and this works out to a combined top rate of 46.8 per cent).

While most New Brunswick earners will endure tax increases, the hikes to the two highest rates will hit workers that the modern economy relies on hardest such as engineers, accountants, doctors, lawyers, and other professionals. As a result, the province will find it more difficult to attract and retain highly skilled individuals.

Combine the personal tax hikes with a 20 per cent increase in the general corporate income tax rate (to 12 per cent from 10 per cent) and New Brunswick’s competitiveness takes a crushing blow. In a world where jurisdictions compete for mobile capital, higher corporate taxes mean less investment, lower productivity, weaker economic growth, and ultimately fewer jobs.

And for what? Despite negative economic implications, the tax increases likely won’t increase government revenues by as much as Minister Higgs hopes.

The types of tax increases announced in the budget typically result in lower than expected revenues because individuals and businesses change their behaviour in response to higher rates. Workers may report less income, arrange their affairs through tax planning techniques to minimize their tax burden, change their working hours, or less aggressively pursue higher paying jobs. Businesses meanwhile may be less inclined to set up operations, expand, or pursue investment opportunities. Both workers and businesses may leave the province altogether in light of the less attractive economic landscape.

It wasn’t long ago that New Brunswick embarked on an aggressive tax reform agenda showing leadership in Canada. In 2009, the Liberal provincial government proposed an ambitious pro-growth plan to move to a personal tax system with just two rates (9 and 12 per cent) and a corporate tax rate of eight per cent by 2012. In 2011 their Progressive Conservative successors watered down the plan and put it on hold. Last week’s budget officially killed it, representing a major shift in tax policy direction and abandonment of pro-growth economic policies.

Ironically, Minister Higgs titled his budget “Managing smarter for a brighter future” when it actually dims the province’s economic prospects. But this is cold comfort for New Brunswickers.

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