BC's $1.5 billion question: How will de Jong eliminate the deficit?

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posted February 18, 2013

Going by Finance Minister Mike de Jong's public comments, Tuesday's provincial budget is supposed to present a plan to finally balance the books. But after four consecutive years in the red, British Columbians can't yet breathe a collective sigh of relief. Critically important is how Minister de Jong plans to eliminate the deficit. Will he take the path of tax increases or spending reductions?

He would be wise to go with the latter. And this is why: research shows successful deficit slayers tend to rely more heavily on spending reductions than tax increases. Canada's own history in the 1990s with federal and provincial deficit elimination is further evidence that spending reductions work.

Plus, the Liberals have already tried the tax hike approach. And it failed.

In last year's budget, they introduced numerous tax increases including a reduction to the amount of income British Columbians can earn tax free, increased Medical Services Plan premiums, and reneging on an earlier promise to cut the small business tax rate.

Those tax hikes haven't closed the deficit. Instead, the deficit is on track to be $500 million more than originally planned and may now even reach $1.5 billion. That's on top of nearly $4 billion in accumulated deficits over the previous three years.

Also troubling, last year's budget signalled a one percentage point increase in the general corporate income tax rate may be in the pipeline. Proceeding with higher corporate taxes will degrade BC's attractiveness as a place to invest and create jobs precisely at a time when improvements are needed as we return to the non-investment friendly PST system.

On personal taxes, there have been calls from various groups, including opposition leader Adrian Dix, to increase taxes on upper-income British Columbians. Succumbing to these demands will simply put BC at a greater competitive disadvantage in attracting and retaining highly skilled workers, investors, and entrepreneurs.

The reality is that BC is nestled between two jurisdictions whose income tax systems are much more competitive. A skilled worker in BC pays a top income tax rate that is nearly 50 per cent higher than a similar worker in neighbouring Alberta. Meanwhile, workers south of the border in Washington State pay no state income tax at all.

Rather than resort to higher taxes to balance the budget, de Jong should look for savings on the spending side. The good news is there's room to scale back.

One area ripe for savings is public sector compensation which has an annual price tag of $24 billion. In a recent study, Fraser Institute researchers found that public sector workers in BC earn on average 14 per cent higher wages than workers doing similar jobs in the private sector. They also found public sector workers enjoy more generous non-wage benefits (pensions, early retirement, and job security). Aligning overly generous public sector pay with the private sector would allow the BC government to save big dollars.

Bold reforms to the structure and delivery of public programs would also generate substantial savings. There is no better place to start than health care, the government's largest program which consumes approximately 44 per cent of the budget. By implementing policies common in other nations with universal health care (such as cost sharing and increased competition in the delivery of publically funded care), the government could reduce spending and provide better quality care for patients.

de Jong could go even after lower-hanging fruit and eliminate or scale back some of the personal and corporate tax credits currently offered. In many cases tax credits are effectively a form of government spending. They cost the provincial coffer over $1.3 billion in total. Some have questionable economic value while others unfairly provide special privileges to certain individuals or businesses at the expense of others.

British Columbians should in principle welcome Minister de Jong's commitment to a balanced budget. But that's only part of the battle. How he plans to get there matters a great deal.

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