VANCOUVER, BC-The BC government should use its next budget to reduce taxes and cut spending in order to set the province back on a path to prosperity, says Niels Veldhuis, Fraser Institute senior economist.

"Today's throne speech is the first chance for the government to show British Columbians it has a vision for returning the province to prosperity; that it has a plan for making the province the most attractive jurisdiction in Canada in which to work, invest and engage in entrepreneurial activities," Veldhuis said of the traditional speech from the throne that will open the next session of BC's legislature.

"The key for this government is its March 2 budget which must get back to economic fundamentals-and that means tax relief and reduced spending in order to strengthen BC's investment climate."

Last year the B.C. economy shrunk by 2.4 per cent, shed nearly 55,000 jobs, and saw unemployment increase from 4.6 to 7.6 per cent. While the economy is forecast to improve this year, a recent study by Harvard economists shows that the best way to stimulate economic activity is through tax relief, not increases in government spending.

Veldhuis makes three specific recommendations for reducing taxes:

• Eliminate the top personal income tax rate of 14.7 per cent and move toward a single-rate tax (as is the case in Alberta);
• Further reduce the general corporate income tax rate with the goal of maintaining the country's lowest rate; and
• Increase the small business tax threshold to $1 million to help mitigate the tax penalty on small businesses as they grow.

But hand in hand with tax relief, Veldhuis urges the government to reduce spending.

"The government will likely use the deficit as an excuse not to reduce taxes. Only by reducing spending will it be able to square the circle to reduce taxes and balance the budget."

Veldhuis suggests the obvious place to cut spending starts with health care, which accounts for 42 per cent of total program spending in the province and is the largest expenditure item in the budget.

"Despite continuous rhetoric from public sector unions who benefit from the structure of the current system, B.C. could reduce spending and simultaneously improve the state of health care. The key is program reform, specifically, allowing competition in the delivery of publicly funded care and cost sharing," Veldhuis said.

By requiring patients to share in the cost of their care, total health care spending could be reduced by 12 per cent (after accounting for the additional out-of-pocket payments for British Columbians) and government spending by about 20 per cent. International evidence shows that when patients are responsible for some of the cost of their care, they use fewer resources and end up no worse off in terms of health outcomes. Cost sharing would result in a savings of about $3.1 billion in 2010-11.

Changing the way hospitals are funded and allowing more competition in the delivery of publicly funded services also offers an opportunity to reduce costs. Moving to activity-based funding in which hospitals would be paid per patient they treat rather than receive a pre-set yearly budget would result in about $735 million in savings in 2010/11.

"Introducing just these two sensible health policies could reduce public health spending by an estimated $3.8 billion in 2010-11 alone. Similarly, education and other government services could be vastly improved through program reform, while spending less," Veldhuis said.

"The $3.8 billion annual savings would not only bring spending in line with revenues, it would allow B.C. to enact a multi-year tax-relief plan."

Veldhuis also recommends using the budget to deal with the excessive burden of government regulation which decreases innovation, delays the development of products, stifles entrepreneurship and restricts competition in the province. Recent estimates of the cost of regulation on B.C. businesses amount to $4.8 billion a year or 2.5 per cent of total economic output. This does not include the impact of new environmental initiatives being considered such as the proposed cap-and-trade system aimed at reducing greenhouse gas emissions.

"Reducing red tape and scrapping pet environmental initiatives should also be a key priority in the 2010 budget," he said.

"A budget that reduces spending, reforms key government programs, balances the budget and reduces taxes and regulations would provide the necessary incentives for individuals and businesses to engage in productive activities. Most importantly, it would ensure a bright future for all British Columbians."