By Charles Lammam and Niels Veldhuis
With economic uncertainty as the backdrop, the B.C. Liberal government had to put forth a prudent budget.
Finance Minister Kevin Falcon acknowledged as much by reassuring British Columbians the budget was “built on fiscal discipline” and lays a “firm foundation for the future.”
He even warned of the perils of additional government taxes, spending, and borrowing, calling such measures “potentially catastrophic.”
We couldn’t agree more.
Unfortunately, instead of acting on the Falcon’s rhetoric, B.C.’s 2012 budget increases government spending, hikes taxes, and significantly ramps up government debt – exactly what the finance minister said the government should not do.
After four consecutive years of budget deficits totalling $5.6 billion, the B.C. Liberals plan to return to a surplus position in 2013/14. However, that’s where the good news ends.
To balance the books, it is relying on a host of new tax increases, including a reduction to the amount of income British Columbians can earn tax free, increased MSP premiums, 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 potential of higher business taxes will prove especially damaging to B.C.’s economy, creating policy uncertainty during already uncertain economic times, and degrading B.C.’s investment climate when improvements are needed to counteract the blow from restoring the Provincial Sales Tax.
The tax increases are partly to help pay for several new boutique tax credits targeted at particular individuals and businesses.
These tax credits will keep other tax rates higher to compensate for the lost revenues.
The government could have balanced the budget sooner without increasing taxes had the B.C. Liberals restrained the growth of government spending more aggressively than the 1.8 per cent annual growth planned for the next three years.
While some might balk at the idea of further restraint, the key for success is to couple spending restraint with program reform.
Consider health care, the government’s largest expense that has consumed ever more government resources. In just a decade, health care has grown from 37 per cent of government program spending in 2001/02 to 43 per cent today.
The trend of skyrocketing health-care costs will continue as the population ages.
By reforming how the health-care system operates, the government could have reduced spending while improving the quality of services.
For examples of such reform, we need only look to policies that are common in universal health-care systems around the world.
The lack of significant health-care reform was a lost opportunity to control long-term spending growth.
The most troubling aspect of the budget is the alarming increase in government debt. B.C.’s government debt will expand from a low of 18 per cent of the economy (Gross Domestic Product) in 2007/08 to 28 per cent by 2014/15.
Because of this dramatic increase in debt, a larger portion of provincial revenues will be devoted to interest payments instead of funding important public programs or improving the competitiveness of B.C.’s tax regime.
The added debt will also be a drag on B.C.’s economy and an unfair burden on the next generation of taxpayers.
Charles Lammam and Niels Veldhuis are economists with the Fraser Institute.
