Upcoming budget a chance for BC to get the basics right

On February 18th British Columbians will be watching to see if finance minister Mike de Jong’s budget sets out a plan to deliver on his government’s ambitious goals with respect to economic growth and job creation. And the truth is, the province needs it. The past year was a disappointing one for BC in terms of economic and employment growth compared to other provinces.

Tuesday’s provincial budget is an opportunity to put the past behind and for Mr. de Jong to lay the foundation for stronger economic performance in the future. There is no better place to start than ensuring the province has a strong fiscal policy framework characterized by balanced budgets, competitive taxes, and reduced government debt. Put differently, Mr. de Jong can start by getting the basics right.

His first and most immediate task is to ensure a balanced budget. While the government’s latest financial update signaled that the Liberals are on pace to eliminate last year’s $1.1 billion deficit, the situation is more complicated because the province separates its operating expenses from its long-term capital expenses.

This separation of expenses is what allows the Liberals to forecast a balanced operating budget in 2013-14, while at the same increasing taxpayer-supported debt by $3.8 billion. A more ambitious goal, then, is for de Jong and the Liberals to deliver a balanced budget for both operational and capital spending – meaning no additional debt.

To help close this year’s operating deficit, budget 2013 unwisely increased some of the most economically damaging types of taxes. Specifically, the budget increased the general corporate tax rate to 11 per cent from 10 per cent and introduced a new top personal income tax rate of 16.8 per cent on upper earners. These tax hikes have made BC less competitive, especially relative to bordering jurisdictions such as Alberta and Washington state. Consider that BC’s top personal rate is now 68 per cent higher than Alberta’s (10 per cent). Meanwhile, Washington has no state income tax at all.

Although the tax measures were sold as “temporary,” economic research is clear that corporate and personal income tax hikes discourage investment, business development, work, and entrepreneurship – all of which are activities that help economies grow and create jobs. If de Jong wants to improve BC’s tax competitiveness, he should consider reversing these “temporary” increases.

Doing so is doubly important given the return to the PST and the dramatic increase in the cost of doing business and investing in the province. In fact, BC’s overall tax rate on new investment went from approximately 18 per cent (with HST) to the highest rate in the country at 28 per cent (with PST). All other major provinces in Canada have moved to a value-added tax like the HST, so the Liberals would be wise to look at measures that offset the PST’s re-introduction.

To their credit, the Liberals have restrained operating spending somewhat in recent years but greater spending restraint would create the fiscal room for more competitive taxes that better positions the province for attracting and retaining investment, entrepreneurs, and skilled workers such as doctors and engineers.

A good starting point is to tackle the largest component of spending: the compensation of government employees. Government workers in BC currently enjoy a 14 per cent average wage premium compared to similar positions in the private sector. This is on top of more generous pensions, an earlier average age of retirement, and much greater job security. A phased-in plan to bring government employee compensation more into line with private sector norms would be a major source of savings.

Another area ripe for spending restraint is health care, which will continue to consume more government resources as the population ages. Health care will consume approximately 44 per cent of program spending this year, up from 41 per cent just four years earlier. Here, the Liberals should look at adopting policies common in other countries with universal access health care (like Netherlands and Switzerland) that promote greater competitive pressures between suppliers and better incentives for patient decisions, while producing better quality care.

Spending restraint would also help put an end to BC’s recent expansion in government debt. Taxpayer-supported debt will reach approximately $42 billion this year (19 per cent of the provincial economy), up from $26 billion (13 per cent) in 2008-09. Reducing debt will ease the burden of repayment on the next generation of British Columbians and help lower interest payments, which are projected to be $2.5 billion this year.

In order for de Jong and the Liberals to make progress on the jobs front, the province needs a solid foundation of fiscal policy. That means balanced budgets, competitive taxes, and reduced government debt. Let’s hope Tuesday’s budget gets these basics right.