Less Prudence Than Meets the Eye in BC Budget
Appeared in the Peace River Block News
Personal income tax cuts clearly stole the show in Tuesdays BC budget. And while the income tax rate reduction was certainly welcome, the Liberals failed to reduce the top rate where BC is most uncompetitive relative to neighbouring Alberta. Apart from the income tax cuts however, there was little in the budget to cheer about. In fact, digging into the 165-page budget more deeply reveals some rather troubling details.
For starters, consider the rather large increases in government spending. Total provincial spending is up from $32.9 billion last year (2005-06) to $34.9 billion this year (2006-07), an increase of 6.1 per cent. With the economy growing at 5.9 per cent, the size of the provincial government -- best measured as government spending as a per cent of the economy -- is increasing.
The government also announced a litany of new spending over the next three years: $2.7 billion for health care, $1 billion for education, $392 million for housing, $454 million for social services, $189 million for communities and $265 million for economic development, to name but a few.
On the other hand, the budget included only $103 million for environmental leadership and provided little information and no cost estimates for most of the green initiatives outlined in the Throne speech. In other words, a potentially significant increase in government spending is looming and has not been included in the current spending plan.
The uncertainty surrounding the green initiatives will, in all likelihood, have a negative impact on investment in British Columbia, especially in the resource sector. Businesses are unlikely to invest in the province without a clear indication of the regulations and costs they will face in coming years.
Another cause for concern is the creation of the $250 million Housing Endowment Fund to finance future government spending. Canadas Auditor-General has repeatedly chastised the federal government for its use of similar funds. Money placed in these organizations does not face the same oversight and scrutiny as other government spending.
Perhaps the most disappointing aspect of the budget was the alarming increase in government debt, despite a healthy surplus of $2.9 billion this year and surpluses in each of the next three years. Total government debt is set to increase from $34.4 billion to $40.0 billion in just three years, an increase of $5.6 billion. As a result, a larger portion of provincial spending will be devoted to interest payments in each of the next three years.
The increase in B.C.s debt stands in stark contrast to the situation in Alberta where the government has aggressively paid down the debt to the point where the province is now debt-free.
Had the entirety of the $2.9 billion surplus been used to pay down the provincial debt, the province would have decreased the $2.3 billion it currently pays in interest each year. Yearly interest savings could then have been used for the governments strategic priorities whether increased spending or tax relief. Regardless of the governments preferences, paying down debt and reducing interest costs is simply a more prudent approach.
Finally, the government is using current commodity prices to forecast revenues. This means even a slight change in oil or natural gas prices will have a significant impact on revenues. Consider that natural resource revenues are estimated to account for 12.4 per cent of total revenues this year (2007/08) and that a $1 drop in the price of natural gas can reduce revenues by $300 to $350 million.
Any significant change in resource prices could place the government in a very difficult fiscal position. A reduction to historic averages means that the province would have to decrease spending or increase taxes to balance its budget.
While the government delivered its fourth balanced budget and second multi-billion dollar surplus, BC taxpayers have reasons to be worried. The large spending increases contained in the 2007 budget along with the run-up in debt, unfunded green initiatives, and optimistic price projections for natural resources could put the future fiscal health of the province in jeopardy.
For starters, consider the rather large increases in government spending. Total provincial spending is up from $32.9 billion last year (2005-06) to $34.9 billion this year (2006-07), an increase of 6.1 per cent. With the economy growing at 5.9 per cent, the size of the provincial government -- best measured as government spending as a per cent of the economy -- is increasing.
The government also announced a litany of new spending over the next three years: $2.7 billion for health care, $1 billion for education, $392 million for housing, $454 million for social services, $189 million for communities and $265 million for economic development, to name but a few.
On the other hand, the budget included only $103 million for environmental leadership and provided little information and no cost estimates for most of the green initiatives outlined in the Throne speech. In other words, a potentially significant increase in government spending is looming and has not been included in the current spending plan.
The uncertainty surrounding the green initiatives will, in all likelihood, have a negative impact on investment in British Columbia, especially in the resource sector. Businesses are unlikely to invest in the province without a clear indication of the regulations and costs they will face in coming years.
Another cause for concern is the creation of the $250 million Housing Endowment Fund to finance future government spending. Canadas Auditor-General has repeatedly chastised the federal government for its use of similar funds. Money placed in these organizations does not face the same oversight and scrutiny as other government spending.
Perhaps the most disappointing aspect of the budget was the alarming increase in government debt, despite a healthy surplus of $2.9 billion this year and surpluses in each of the next three years. Total government debt is set to increase from $34.4 billion to $40.0 billion in just three years, an increase of $5.6 billion. As a result, a larger portion of provincial spending will be devoted to interest payments in each of the next three years.
The increase in B.C.s debt stands in stark contrast to the situation in Alberta where the government has aggressively paid down the debt to the point where the province is now debt-free.
Had the entirety of the $2.9 billion surplus been used to pay down the provincial debt, the province would have decreased the $2.3 billion it currently pays in interest each year. Yearly interest savings could then have been used for the governments strategic priorities whether increased spending or tax relief. Regardless of the governments preferences, paying down debt and reducing interest costs is simply a more prudent approach.
Finally, the government is using current commodity prices to forecast revenues. This means even a slight change in oil or natural gas prices will have a significant impact on revenues. Consider that natural resource revenues are estimated to account for 12.4 per cent of total revenues this year (2007/08) and that a $1 drop in the price of natural gas can reduce revenues by $300 to $350 million.
Any significant change in resource prices could place the government in a very difficult fiscal position. A reduction to historic averages means that the province would have to decrease spending or increase taxes to balance its budget.
While the government delivered its fourth balanced budget and second multi-billion dollar surplus, BC taxpayers have reasons to be worried. The large spending increases contained in the 2007 budget along with the run-up in debt, unfunded green initiatives, and optimistic price projections for natural resources could put the future fiscal health of the province in jeopardy.
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