With economic uncertainty as the backdrop, it was critical for the BC government to put forth a prudent budget. Finance minister Kevin Falcon acknowledged as much by reassuring British Columbians that the budget was “built on fiscal discipline” and lays a “firm foundation for the future.” Falcon even warned of the perils of additional government taxes, spending, and borrowing in the current economic environment, calling such measures “potentially catastrophic.”
We couldn’t agree more. Unfortunately, however, instead of acting on the minister’s rhetoric, BC’s 2012 budget increases government spending, hikes taxes on British Columbians, and significantly ramps up government debt—exactly what the finance minister says the government should not do.
After four consecutive years of budget deficits totaling $5.6 billion, BC’s Liberal government is finally planning to return to a surplus position in 2013/14. But that’s where the good news ends.
To balance the books, the government is relying on a host of new tax increases including a reduction to the amount of income British Columbians can earn tax free, increased MSP premiums, reneging on an earlier promise to eliminate the small business tax rate, higher tobacco taxes, and a “provisional” one percentage point increase to the general corporate income tax rate in 2014/15.
The potential of higher business taxes will prove especially damaging to BC’s economy. First, they will create policy uncertainty during already uncertain economic times. And they will degrade BC’s investment climate when improvements are desperately needed to counteract the blow from restoring the PST next year.
The tax increases in the budget are partly to help pay for several new boutique tax credits targeted at particular individuals and businesses. These tax credits, which are basically new spending measures, will keep other tax rates higher than they otherwise would be to compensate for the lost revenue. Rather than further distort the tax system and provide disproportionate goodies to some groups, a more effective approach would have reduced tax rates more broadly to the benefit all British Columbians.
The government could have balanced the budget (even sooner) without increasing taxes had the Liberals restrained the growth of government spending more aggressively than the 1.8 per cent annual growth planned for the next three years. While some might balk at the idea of further restraint, the key for success is to couple spending restraint with program reform.
Consider health care, the government’s largest expense which has consumed ever more government resources. In just a decade, health care has grown from 37 per cent of government program spending in 2001/02 to 43 per cent today. The trend of skyrocketing health care costs will continue as the population ages and demands for services grow (health care spending will reach 45 per cent by 2014/15).
By reforming how the health care system operates, the government could have further restrained or even reduced spending while improving the quality of services; for examples of such reform we need only look to policies that are common in universal health care systems around the world.
But rather than engage in meaningful program reform, the government chose to simply increase health care spending, albeit at a reduced rate and despite previous increases that have done little to improve quality. The lack of significant health care reform was indeed a lost opportunity to effectively control long-term spending growth.
The most troubling aspect of the budget, however, is the alarming increase in government debt. Mainly as a result of increased capital expenditures, the BC government’s debt will expand by $15 billion (or 30 per cent) to $66 billion over the next three years. As a percentage of the province’s economy (GDP), the provincial debt will increase from a low of 18 per cent in 2007/08 to 28 per cent by 2014/15—approximately the same debt level the Liberals inherited from the previous NDP government back in 2001.
Because of this dramatic increase in debt, a larger portion of provincial revenues will be devoted to interest payments instead of funding important public programs or improving the competitiveness of BC’s tax regime. Not to mention the added debt will be a drag BC’s economy and an unfair burden on the next generation of BC families who will be responsible for repayment.
With increased spending, higher taxes, and expanding debt, Minister Falcon has failed to provide a budget that lays a “firm foundation for the future.” More controlled spending through program reform, tax relief, and reduced government debt, are policies that would truly build for BC’s future.