Governments' budget focus should have been on the investment climate

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Appeared in Business in Vancouver

With the federal and B.C. governments both tabling budgets within a week of the Winter Olympics' closing ceremonies, both governments had a chance to build on the tremendous momentum and positive spirit of the Games.

Instead, both levels opted for mediocrity, delivering uninspiring and timid budgets that will do little, if anything, to prepare this province and country for economic growth.

With weak economic growth expected for the next several years, the federal and B.C. governments should have delivered prosperity budgets. A set of prosperity budgets would have strengthened the investment climate with the goal of making B.C. and Canada the most attractive jurisdictions in the world to work, invest and engage in entrepreneurial activities. Rather than laying the foundation for a stronger economy, both budgets leave a significantly increased debt burden for future generations.

Start with the federal budget. In the coming year (2010-11), spending is set to increase by $12.8 billion following a $28.9 billion increase this year (2009-10). The federal government claims this spending will boost economic activity, but that's wishful thinking on the government's part and is not supported by academic work on the impact of polices aimed at stimulating the economy.

A recent analysis by Harvard economists Alberto Alesina and Silvia Ardagna of stimulus initiatives in Canada and 20 other industrialized countries from 1970 to 2007 found that unsuccessful stimulus initiatives relied on government spending. Successful stimulus initiatives - those that increase economic growth - focus on tax cuts.

Instead of tax cuts, the federal government embarked on spend-a-thon that will result in $105 billion in deficits over the next five years. This follows a $54 billion deficit this year. Because of these deficits, the federal debt will swell to $622.1 billion by 2014-15 from $463.7 billion in 2008-09, undoing a decade of debt repayment.

Thankfully, the provincial government has been a little more tempered in its approach to spending. The B.C. government plans to constrain annual increases in spending to an average of 2.3% over the next three years (2010-11 to 2012-13). As a result, B.C.'s deficit will decrease to $1.7 billion in 2010-11 from $2.8 billion in 2009-10 and the budget will effectively return to balance in 2012-13.

However, yearly deficits coupled with significant increases in capital spending will increase the B.C. government's debt by an alarming $14.5 billion or 35% over the next three years. As a percentage of total economic output (GDP), the provincial debt will increase to 26% in 2012-2013 from a low of 18% in 2007-2008, approximately the same debt level the Liberals inherited from the previous NDP government in 2001.

While deficits will essentially be eliminated by 2012-13 through increased revenue and constrained spending, the B.C. government could have easily balanced the budget in the coming year (2010-11). Instead, it elected to ramp up health-care spending, the government's single largest expense, yet again - by $2.2 billion or 13.8% over the next three years. This move follows a 24% hike in health spending over the past four years.

By continuing to increase health-care spending, the B.C. government is buying into the false notion that more money will improve services. The reality is the province's health-care woes won't be solved until the government adopts best practices from countries around the world with universal health-care systems.

Had both the federal and provincial governments taken deficits seriously and delivered budgets that reduced government spending, they could have easily balanced the books much sooner and implemented polices that improve the province's and country's economy. If the goal is to improve our long-term economic prospects, increase investment and create more jobs, then both governments should have reduced government spending, balanced their budgets and outlined multi-year plans to reduce taxes.

Of particular concern in Canada and B.C. are high marginal personal income tax rates that continue to penalize productive activities such as work effort, savings, investment, risk-taking and entrepreneurship.

Unlike Canada's athletes, who made the country proud, the federal and B.C. governments have failed dismally to provide Canadians with anything to cheer about.

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