B.C. 2016 budget overview: Stay-the-course budget a mixed bag, good on balance

On the whole, B.C.’s 2016 budget is largely a stay-the-course budget, which is actually positive news on many fronts. It’s positive in part because the B.C. government plans to record its fourth consecutive operating surplus in 2016/17, projected at $264 million. (Further balanced budgets are projected for 2017/18 and 2018/19). This puts B.C. is a very unique position within Canada as many governments continue to grapple with large and persistent deficits.

Despite projecting small operating surpluses from 2015/16 to 2018/19, B.C.’s government net debt (a measure that adjusts for financial assets) will grow by almost $4 billion over the budget plan. B.C. can balance its budget and still accumulate debt because the province separates annual spending (the operating budget) from long-term spending (the capital budget). Think of it from a household’s perspective: you can balance your monthly budget in terms of income versus expenses but continue to add debt with big-ticket purchases such as a home or car.

However, as a share of the provincial economy, provincial government debt is finally set to decline after many years of increasing. In fact, the budget projects the share of net debt to fall slightly from 16.7 per cent in 2015/16 to 16.2 per cent by 2018/19.

Of note, the budget established a new B.C. Prosperity Fund with an initial deposit of $100 million in 2015/16 that allows the government to deposit operating surpluses (at its discretion), with the investment income being used in part to “retire debt.” While it is not clear this is the most effective use of operating surpluses compared to alternatives (for instance, outright debt repayment or tax relief), it seems that deposits into the fund and the rules around how the money will be disbursed do not follow best practices for similar funds in places like Alaska. Some key drawbacks are the discretion afforded to the government in terms of the amount of contributions and the provision to use up to 25 per cent of the disbursements on “core government priorities in the future,” which appear to include general government spending. For the other 75 per cent, the government says it “will allocate a minimum of 50 per cent of cash flowing into the fund to debt retirement” while “a minimum of 25 per cent will be saved to accumulate earnings.”

When it comes to spending, the government plans to increase overall spending in a relatively prudent fashion over the budget plan, with total spending set to increase from $46.4 billion in 2015/16 to $49.4 billion in 2018/19. On average, total spending is projected to increase 2.1 per cent annually, which is slower than the projected annual rate of economic growth (4.2 per cent) and the combined rate of inflation plus population growth (3.2 per cent).

This means the budget plans to shrink the size of the provincial government, measured both as total spending relative to the economy and on an inflation-adjusted per person basis. If the plan materializes, the provincial government would play a less prominent role in B.C.’s economy.

While the size of government is set to decrease, spending will increase annually over the budget plan in the province’s three major spending areas: 2.8 per cent for health care, 1.6 per cent for education, and 3.4 per cent for social services.

Health care will continue to consume a bigger share of overall program spending, growing from 43.6 per cent in 2015/16 to 44.6 per cent by 2018/19. Unfortunately, the government continues to spend more without major reforms to how services are financed and delivered. To spend less and improve the quality of health care, it is critical to consider policies commonly used in other universal health care systems around the world.

And while the increase in education spending is modest, it comes at a time when enrolment in B.C. public schools has been on the wane in recent years.

Finally, on taxes, the budget confirmed the government’s previous commitment to eliminate its temporary top tax rate on upper income earners, which will help B.C. attract and retain highly skilled workers. On business taxes, however, the budget contained no plan to offset the dramatic increase in business taxes associated with reintroducing the Provincial Sales Tax a few years ago. Almost all of B.C.’s competitors have moved to a value-added sales tax like the now-abolished HST, which exempts business inputs and lowers the cost of investment. The government’s own expert panel recommended introducing a refundable investment tax credit equal to the PST paid on machinery and equipment to improve B.C.’s competitiveness and investment climate.

Failure to address this problem has negative long-term economic implications as B.C. now has one of the highest overall tax rates on new business investment in the country and in fact the developed world. Without more competitive tax policies, B.C. risks losing investment and jobs that may gravitate elsewhere. Encouragingly, the Minister of Finance announced that he will establish a Commission on Tax Competitiveness examining questions such as “whether current tax policy encourages business investment and growth as the province moves further into the 21st century.” Hopefully, the new Commission sparks action.

Finally, the budget announced increases to Medical Services Plan premiums and changes in the structure, with exemptions provided to British Columbians with children. It also announced changes to the property transfer tax including an exemption on newly built homes valued up to $750,000 but increases homes valued over $2 million.

On balance, B.C.’s 2016 budget is generally positive, particularly when measured against the fiscal plans of other Canadian governments.