Better Targeted Tax Relief Would be Better

The B.C. Liberals’ last budget of their mandate is what one expects from a pre-election budget: Spending on high-profile areas like health care, some tax relief, and a balanced budget with debt reduction.

The budget also reveals the true legacy of the past four years -- a better-managed government, but with no revolutionary changes.

The government deserves credit for constraining the growth in overall spending. After adjusting for inflation, provincial government spending has been held near constant during its mandate. The Liberals are, however, planning to increase inflation-adjusted spending by 2.7 per cent next year, representing an increase of nearly $1.5 billion.

Spending on health and education will continue to increase, as they have in each of the past three years. Health care will receive an additional $700 million in 2005-06, while education will be allocated an additional $195 million. This is on top of the 14-per-cent increase in health spending and the 5.5-per-cent increase in education spending between 2000-01 and 2004-05.

Unfortunately, the constraint in the growth of government spending has achieved only a small improvement in the size of the government compared to the economy. While the government sector as a share of Gross Domestic Product in British Columbia has been reduced from 24.9 per cent in 2000-01 to 23.1 per cent in 2004-05, it is still noticeably larger than that in Alberta, Ontario and many neighbouring American states. Further restraint in spending, coupled with measures to improve our economic performance are needed to achieve further reductions in the size of government in this province.

The Liberals should, however, be given credit for resisting the temptation to spend the bulk of the current surplus and have instead used much of it to reduce the province’s debt, thus providing permanent savings through lower debt servicing costs. A word of caution is in order, however, as total debt is set to increase over the course of the next three years as a result of capital spending.

The Liberals have a mixed record on taxes over the past four years. They began their term with critical tax cuts aimed at making the province more competitive. They then reversed course and raised a number of taxes to accommodate increased spending.

Fortunately, the 2005 budget marks the return of tax relief. The government introduced a new tax credit for individuals earning less than $26,000 and targeted Medical Savings Plan assistance to low-income individuals. In addition, tax credits for mining exploration and the film industry were introduced and an increase in the small business income tax threshold to $400,000 from $300,000 was announced.

While we applaud the government for introducing tax relief and avoiding tax increases, most of the tax measures announced Tuesday will do little to improve the province’s economy or competitiveness. The economy would have been better served had the tax relief been more aggressively targeted at business taxes in general and personal income taxes for middle- and upper-income families. Reductions to these types of taxes result in improved incentives for work, savings and investments -- the keys to a long-term successful economy.

In the final analysis, the government’s fiscal management has been sound, spending has largely been contained and the tax burden has been reduced. B.C. is clearly better off than it was four years ago. Much more is needed, however, in terms of both spending restraint, reform of service delivery and further tax relief if we are to build upon the current foundation of prosperity.