Budget a chance for province to get fiscal basics right
Accounting advice: Cut spending, eliminate ‘ temporary’ increase in corporate taxes to boost economy
British Columbians will watch Tuesday to see if Finance Minister Mike de Jong’s budget sets out a plan to deliver on his government’s ambitious goals of economic growth and job creation. And the truth is, the province needs it. The past year was disappointing in terms of economic and employment growth compared to other provinces.
The provincial budget is an opportunity for 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, de Jong can start by getting the basics right.
His most immediate task is a balanced budget. While the government’s latest financial update signalled the Liberals are on pace to eliminate last year’s $ 1.1- billion deficit, the situation is more complicated because B. C. separates its operating expenses from 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 is for de Jong to deliver a balanced operational and capital spending budget — meaning no additional debt.
To help close this year’s operating deficit, budget 2013 unwisely increased some of the most 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 B. C. less competitive, especially relative to bordering jurisdictions such as Alberta and Washington state. Consider that B. C.’ 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 B. C.’ 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, B. C.’ 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.
The Liberals have restrained operating spending somewhat in recent years but greater restraint would create room for more competitive taxes that better positions B. C. for attracting and retaining investment, entrepreneurs, and skilled workers such as doctors and engineers.
A good starting point is the compensation of government employees. Government workers in B. C. 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 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 B. C.’ 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.
For de Jong and the Liberals to make progress on jobs , 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.