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B.C. Budget 2015: The Status Quo Isn't Good Enough

02/19/2015 06:32 EST | Updated 04/21/2015 05:59 EDT
Santi Visalli via Getty Images
VICTORIA, BC - AUGUST 29: Inner Harbour with the Parliament building on August 29, 2014 in Victoria, British Columbia, Canada. (Photo by Santi Visalli/Getty images)

Against the backdrop of a sluggish and uncertain economy, B.C. Finance Minister Mike de Jong unveiled a largely status quo budget on Tuesday. While the fiscal situation in B.C. is better than most provinces, the status quo won't address deficient economic policies or propel B.C.'s economy forward.

Much was made of the higher than expected operating surplus in 2014/15, now forecasted to be almost $900 million, surpassing the $184 million planned surplus in last year's budget. Over the next three fiscal years, the government projects more surpluses totalling just over $1 billion.

Despite these operating surpluses, which put B.C. in an exclusive club in Canada, provincial net debt continues to rise and is forecast to increase by $3.1 billion over the next three years.

B.C. can balance its budget and still accumulate debt because the province separates annual spending (the operating budget) from long-term spending (the capital budget). Think of it from a household's perspective: you can balance your monthly budget in terms of income versus expenses but continue to add debt with big-ticket purchases such as a home or car.

Another problem with the status quo is tax policy. Credit the government for allowing the "temporary" increased top personal income tax rate to expire at the end of 2015; but starting in 2016, B.C.'s top rate will revert back to 14.7 per cent. That rate is still almost 50 per cent higher than Alberta's comparable tax rate, putting B.C. at a disadvantage in attracting and retaining skilled workers, entrepreneurs, and investment.

More troubling is the status quo on business taxes. The budget made no mention of undoing the one percentage point hike to the general corporate income tax rate intended to help eliminate the deficit.

And worst of all, the budget contained no plan to offset the dramatic increase in business taxes associated with reintroducing the PST. Almost all of B.C.'s competitors have moved to a value-added sales tax like the now-abolished HST, which exempts business inputs and lowers the cost of investment. The government's own expert panel recommended introducing a refundable investment tax credit equal to the PST paid on machinery and equipment to improve B.C.'s competitiveness and investment climate.

Failure to address this problem has negative long-term economic implications. A recent University of Calgary study found that B.C. now has one of the highest overall tax rates on new business investment in the country (27.5 per cent) -- neighbouring Alberta has a rate of just 17 per cent. Without more competitive tax policies, B.C. risks losing investment and jobs that may gravitate elsewhere.

Reforming government spending could create the fiscal room needed for tax changes. But the status quo prevailed here, too.

Program spending is forecast to grow from $42.3 billion in 2014/15 to $44.9 billion by the end of the fiscal plan. This works out to an average spending growth rate of two per cent over the next three years. Health care spending is slated to increase annually at 2.8 per cent, education at 1.7 per cent, and social services at 3.3 per cent.

On health care, which consumes an ever larger portion of program spending (now 44 per cent), the budget continues to spend more without reforming how services are financed and delivered. To spend less and improve the quality of health care, we should look at adopting policies commonly used in other universal health care systems around the world.

Finally, while the increase in education spending is modest, it ignores the fact that enrolment in B.C. public schools continues to decline.

De Jong should be commended for B.C.'s exclusive membership in the balanced budget club. But with its commitment to the status quo, the government misses an opportunity to build an even better economic future.

This piece was co-written by Milagros Palacios, Fraser Institute Senior Economist