B.C.’s budget an opportunity for Premier Clark to improve fiscal policy performance

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Appeared in the Vancouver Province, February 16, 2016

A key takeaway from B.C.’s recent throne speech is that the provincial government seems largely committed to staying the course, particularly when it comes to fiscal policies such as controlled spending and balanced budgets. This is a generally sound approach since the government under Premier Christy Clark’s leadership has done a relatively good job at managing provincial finances compared to other provinces.

Nevertheless, the good news about B.C.’s record should not lead to complacency, as there are still important areas where Premier Clark’s government can improve. The upcoming B.C. budget offers an opportunity to build on past successes, while also working to address areas of weakness.

Each year the Fraser Institute measures and ranks the performance of Canada’s premiers in terms of how well they managed provincial finances while in office. Premiers who managed spending more prudently, balanced the books and paid down debt, and reduced and maintained competitive tax rates, rank higher. This year, Premier Clark ranked first overall, essentially tied with Quebec Premier Philippe Couillard for the best record, followed closely by Saskatchewan Premier Brad Wall.

Let’s start with what Clark has done well over the period she is evaluated (2011/12 to 2014/15).

Clark managed the growth in government spending more prudently compared to her counterparts. During her tenure, she increased program spending by an average annual rate of 2.1 per cent, just enough to keep pace with the combined rate of inflation and population growth.

Importantly, the rate of government spending growth under Clark’s tenure was less than the rate of economic growth (3.7 per cent). As a result, the size of B.C.’s government—measured as spending relative to the provincial economy—decreased, meaning the provincial government now plays a less prominent role in B.C.’s economy.

Another bright spot for Clark is that her government has consistently balanced the books. In recent years, several provinces have consistently run budget deficits while B.C. has posted surpluses. In fact, Clark is one of only two premiers (along with Saskatchewan’s Brad Wall) to maintain a small budget surplus, on average, while in office.

Despite finishing on top, Premier Clark’s record has weaknesses. For example, despite avoiding annual budget deficits, Clark has allowed government debt to grow under her watch—by almost $7 billion. This is mainly the result of substantial capital spending by the B.C. government being financed by debt. As a percentage of the economy, the provincial debt burden has grown from 15.7 per cent to 16.4 per cent.

But Clark’s biggest weakness with respect to fiscal policy is in the area of taxation. Two problems stand out.

First, she increased B.C.’s general corporate income tax rate from 10 to 11 per cent, making the province less competitive for investment compared to other jurisdictions. And this increase came on top of reinstating the economically damaging Provincial Sales Tax, which taxes the business inputs used by entrepreneurs and raises the cost of investment.

Second, Clark presided over, and has so far failed to reform, a relatively complicated personal income tax system with five separate tax brackets—the second most among her provincial counterparts. She also enacted a temporary increase in the top income tax bracket for two years that was ultimately eliminated in the 2016 tax year.

In order to build on the strong elements of B.C.’s fiscal policy framework, and to make the province’s tax system more competitive, the Clark government should reverse the recent corporate income tax rate hike and implement a plan to offset the marked increase in the cost of business investment associated with the re-introduction of the PST, especially since almost all of B.C.’s competitors have moved to a value-added tax like the now-abolished HST.

On personal income taxes, simplifying the system by reducing the number of tax brackets and the existing top rate would give B.C. a key competitive advantage over other jurisdictions.

All told, Premier Clark’s record on fiscal policy is positive. There is still, however, room for improvement. The upcoming provincial budget is an opportunity to further strengthen Clark’s fiscal record by addressing areas where her government has performed poorly.