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BC budget needs to focus on cutting spending and improving economic incentives

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Release Date: February 13, 2009

VANCOUVER, BC-The BC government should use its upcoming budget to reduce government spending and implement permanent tax relief aimed at improving economic incentives, recommends Niels Veldhuis, Fraser Institute senior economist.

"There is no doubt the province is facing an economic slowdown and uncertainty. However, the government should not use the current economic woes as an excuse to avoid doing what is needed to improve BC's competitiveness," Veldhuis said.

"Meaningful spending reductions and program reform are required to help balance the budget and provide the resources to implement tax relief that will improve the incentives for working and investing."

Veldhuis recommends the government focus on four key areas:

  • Personal income taxes: Eliminate the top rate of 14.7 per cent (a projected cost of $327 million in 2009/10), thus improving the incentives for effort, risk-taking and entrepreneurship, and aiding in attracting and retaining professional and skilled workers;
  • Corporate income taxes: Reduce the corporate income tax rate to eight per cent from 11 per cent ($236 million in 2009/10), giving B.C. the country's lowest corporate income tax rate thus promoting and encouraging investment and development in the province;
  • Small business taxes: Increase the threshold for income eligible for the small business tax rate from $400,000 to $1 million ($77 million in 2009/10) creating an enormous advantage for small businesses in British Columbia by mitigating the impact of the higher corporate income tax rate they face as they grow; and
  • Provincial Sales Tax (PST): Harmonize the provincial sales tax with the GST (a revenue-neutral change) to exclude business inputs from taxation (currently the case with the PST) and reduce compliance costs on businesses by reducing the paperwork and related efforts to one system instead of two.

He noted these initiatives would cost an estimated $640 million in 2009/10. He also recommends the government eliminate tax rebates and credits that favour certain types of business investments over others (amounting to approximately $360 million per year) to help offset the revenue losses.

Most critically, Veldhuis emphasizes the need to reduce spending and reform government programs to help balance the budget and reduce taxes.

Average annual increases in program spending over the past five years (six per cent) were significantly above the rate needed to compensate for inflation and population growth (3.3 per cent).

Had the BC government held spending growth to inflation and population growth over the past five years, BC's program spending would have totaled $32.3 billion this year (2008/09) instead of the projected $35.8 billion -- a difference of $3.5 billion for 2008/09 alone.

Recent news reports quoted Premier Gordon Campbell and Finance Minister Colin Hansen suggesting cuts to healthcare and education are the only alternatives to running a deficit.

"Unfortunately, the Campbell government has bought into the fallacy that healthcare, education, and many other government programs need ever greater budgets," Veldhuis said.

Nadeem Esmail, Fraser Institute director of health system performance studies, points out that BC spent nearly $15 billion on health care in 2008/09 (41.8 per cent of program spending), yet the median wait time for medically necessary care from GP referral to treatment still stood at 17 weeks, a length of delay that ranks among the worst in the developed world. Additionally, British Columbian's access to doctors and medical technology significantly lags that of other developed nations.

"BC could save money without negatively impacting the quality of health care if it funded hospitals on the basis of services delivered, rather than give hospitals blocks of money. This would improve efficiency. Private hospitals should also be allowed to compete for the delivery of publicly funded services as they are in many European nations," Esmail said.

"The BC government has a unique opportunity to ensure a brighter future for all British Columbians. However to seize the opportunity it must make the necessary tough choices. Spending reductions and tax relief would be a true stimulus to wealth creation now and in the future," Veldhuis added.