B.C. at fiscal crossroads—next week’s budget update will reveal path new government takes

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Appeared in the Vancouver Sun, September 8, 2017

While in office, every government faces a few defining moments. Often, a government’s first budget is one of them because it sets its immediate and longer-term priorities. It’s also a chance for the public to get an early indication of which direction the government is heading.

That’s why next week’s budget update from British Columbia’s new NDP government is so important. It will signal to entrepreneurs, businesses and investors, both inside and outside the province, as well as British Columbians generally, how the government plans to manage provincial finances.

Will it continue down the prudent fiscal path charted by previous governments that have, over the years, helped create one of the strongest fiscal records in Canada? Or will it follow other former Canadian fiscal leaders—Alberta and Ontario—both of which currently struggle with mounting government debt and weakening economic competitiveness?

Unfortunately, rhetoric from the campaign trail, along with the power-sharing agreement struck with the Green Party, stressed increased spending and higher taxes, which suggest the latter may be more likely. Whichever path the NDP government chooses next week, it will have big implications for B.C.’s finances and the economy more broadly.

The province currently enjoys one of the strongest fiscal positions in Canada, but it’s important to remember how quickly things can change. As we note in a recent study, former fiscal leaders have quickly fell from positions of strength.

The transformation of Alberta and Ontario into fiscal laggards should be a cautionary tale for B.C., which has tabled five consecutive balanced operating budgets with a surplus last year of $2.7 billion, much higher than expected.

The province also enjoys a relatively low government debt burden—B.C.’s per capita debt is the second lowest in Canada. As a result, B.C. spends fewer tax dollars in interest payments each year to service debt than other provinces.

On taxes, while there’s much room for improvement when it comes to the taxation of business investment, B.C. maintains competitive personal income tax rates at most income levels compared to other provinces.

All of this didn’t happen by accident. And it’s not guaranteed to last. B.C.’s enviable fiscal position is the result of successive governments prioritizing spending, which has helped keep the operating books balanced and higher tax rates largely at bay. In fact, while other provinces have raised tax rates in response to run-ups in spending and debt, B.C. had the luxury in last February’s budget to propose tax cuts.

Enjoying balanced operating budgets and debating which taxes to cut is a good—and frankly uncommon—position in Canada.

Consider Alberta—a prime example of how bad policy choices can quickly turn a good situation bad. Successive provincial governments (both Progressive Conservative and NDP) doubled down on the failed policies of rapidly increasing program spending to unaffordable levels. In fact, nine of the last 10 budgets tabled in Alberta have been deficits, which have led to a rapid erosion of the province’s finances.

Where Alberta was essentially free of debt (after adjusting for financial assets) as recently as 2015/16, it frittered its entire savings away and is on pace to reach approximately $10,000 in debt per Albertan by 2019/20. When that happens, and if B.C. continues on its current prudent path, B.C. will have the lowest per-person government debt burden in the country.

Alberta also raised taxes in an unsuccessful attempt to address its fiscal challenges, eroding the province’s unique tax advantages on personal and corporate income.

Simply put, Canada is rife with examples, both historical and contemporary, of once-strong provinces with sound fiscal track records stumbling. It only takes a few steps down the wrong path to fall quickly from fiscal leader to laggard.

We’ll see next week what path B.C.’s new government will take.

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