Flaherty has opportunity to deliver the prudent budget that Falcon didn't

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Appeared in Business in Vancouver
With economic uncertainty lurking around every corner, it’s critical that governments across Canada show fiscal discipline and put forth prudent budgets.

Here in B.C., Finance Minister Kevin Falcon reassured British Columbians that his government’s 2012 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, calling such measures “potentially catastrophic.”

We couldn’t agree more. Unfortunately, B.C.’s 2012 budget does the opposite of what the minister claims.

The Liberals are finally planning to balance the budget by 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 in the amount of income British Columbians can earn tax free, increased MSP premiums, higher tobacco taxes, reneging on an earlier promise to eliminate the small-business tax rate and a “provisional” one percentage point increase to the general corporate income tax rate in 2014-15.

The government could have balanced the budget sooner without increasing taxes had the Liberals restrained the growth of government spending more aggressively than the 1.8% annual growth planned for the next three years.

The most troubling aspect of the budget, however, is the alarming increase in government debt. As a percentage of the province’s economy (GDP), the provincial debt will increase from a low of 18% in 2007-08 to 28% by 2014-15 – approximately the same debt level the Liberals inherited from the previous NDP government in 2001.

While increased spending, higher taxes and expanding debt certainly won’t lay a “firm foundation for the future” for British Columbia, let’s hope minister Falcon’s federal counterpart, Jim Flaherty, delivers a more austere federal budget on March 29.

The key to balancing the federal budget quickly is to reduce program spending to pre-stimulus levels. Although Canadians were led to believe the stimulus spending of 2009 was temporary, it was anything but. Spending increased by $35 billion in 2009-10 partly as a result of the “temporary” stimulus, but instead of decreasing by roughly the same amount the following year, the spending became the baseline for future budgets.

To reduce current federal government spending to its 2008-09 pre-stimulus level, Flaherty has to reduce program spending by $10 billion in 2012-13. Under this plan the budget will be balanced by 2013-14.

The projected federal debt would decrease by $55 billion over the next five years and result in lower annual interest costs.

This plan also mitigates the risks associated with negative economic shocks in the future and leaves the Conservatives with significant upside potential. That is, if revenue rebounds robustly, the government would have the fiscal room to implement a much-needed multi-year plan to reduce personal income taxes.

Spending reductions, balanced budgets, debt repayment and tax relief worked wonders before and made Canada the envy of the developed world. Indeed, Canada’s remarkable fiscal transformation that began in the mid-1990s contributed significantly to its outstanding economic performance from 1997 to 2007.

Falcon missed his chance to put forth a prudent budget; let’s hope Flaherty doesn’t miss his.

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