B.C. budget 2017 does little to promote ‘competitive’ economy
Today the BC Liberals presented their much anticipated 2017 budget, ahead of the May provincial election. While there are some positive elements, overall the budget does little to promote a “competitive, job-creating economy,” as Finance Minister Mike de Jong claims.
Prudent management of public finances is critical for any jurisdiction interested in laying the foundation for a competitive economy. The British Columbia government tabled its fifth consecutive balanced operating budget, with further balanced budgets planned over the next three years (from 2017/18 to 2019/20). This is a bright spot of the budget, as many governments across the country grapple with large and persistent spending-induced deficits.
Of note, however, the operating surplus in the current fiscal year of 2016/17 will be approximately $700 million smaller than expected just a few months ago ($1.5 billion vs $2.2 billion). The main reason is that the government’s updated estimate for spending in 2016/17 is now significantly higher than was originally planned. Specifically, last year’s budget forecasted a spending increase of 2.4 per cent in 2016/17. This year’s budget more than doubles that estimate as spending is now estimated to be up 5.6 per cent from last year’s level.
The government says it will slow down the rate of spending growth in the years to come, holding spending increases to 1.5 per cent annually over the next three years. However, as this year’s budget shows, it’s one thing to promise spending restraint and another to actually achieve it.
Despite projecting small operating surpluses from 2017/18 to 2019/20, B.C. government net debt (a measure that adjusts for financial assets) will grow by $6 billion over the budget plan. The government can balance its budget and still accumulate debt because the province separates annual spending (the operating budget) from long-term spending (the capital budget).
The continued growth in government debt, especially during a non-recessionary period, carries risk. For instance, it could reduce the government’s fiscal flexibility in future years, particularly if the economy falls into a recession or if interest rates start to rise to more normal levels.
The throne speech from last week suggested that tax cuts would be in the budget. And while budget 2017 does contain tax reductions, there are more effective tax measures in terms of fostering economic growth than what was put forth in the budget.
By far budget 2017’s most significant announcement is the reduction to (and eventual elimination of) B.C.’s Medical Services Plan (MSP) premiums. Specifically, the budget announced that starting in 2018 the MSP tax would be reduced by half for households with an annual income of up to $120,000. In the fiscal year of 2018/19, this amounts to nearly a $1 billion tax reduction.
While this tax reduction is significant and likely politically popular, it’s a major lost opportunity. The government could have used the fiscal room much more effectively in terms of promoting a more competitive economy. For instance, reducing marginal tax rates on personal income would have actually improved the incentives for British Columbians to engage in productive economic activity, contributing to stronger economic growth.
On business taxes, the government could have done more to help propel the province’s economic prospects further ahead.
The budget did announce the phased elimination of the Provincial Sales Tax (PST) on electricity used by businesses. While this is a good start, PST will continue to be imposed on other business inputs (machinery, equipment, technology, etc.). Failure to comprehensively address the PST on business inputs will continue to hinder B.C.’s economic prospects, as the province has one of the highest overall tax rates on new business investment in the country and the developed world.
Budget 2017 also reduced the preferential corporate income tax rate for small businesses from 2.5 to 2 per cent. This is another lost opportunity for more effective tax relief. Reducing the small business rate will increase the gap with the rate for larger businesses (11 per cent). Research shows this distortion creates a strong disincentive for B.C.’s small businesses to grow and expand.
Contrary to Minister de Jong’s rhetoric, B.C.’s 2017 budget does little to make the provincial economy more competitive.