Balanced budget comes with short and long-term pain

Guest editorial by Jason Clemens & Niels Veldhuis - Balanced budget comes with short and long-term pain

By Jason Clemens and Niels Veldhuis

On Tuesday, the BC Liberals unveiled what is perhaps one of the more unconventional pre-election budgets in recent memory. Rather than the usual special-interest spending and boutique tax credits, the Liberals put enormous stock in balancing the budget. The balanced budget along with several other important advances are worthy of praise but, unfortunately, the tax increases included in the budget will impede B.C.’s competitiveness.

First the good news. Returning to a balanced budget this year (2013/14) is a marked improvement over the $1.2 billion deficit recorded last year. It means British Columbia is no longer borrowing to pay for current programs.

The BC Liberals also wisely and proactively raised the possibility of creating an endowment fund based on resource revenues, in part to avoid the vast mistakes observed in Alberta.

And the Liberals have re-committed to constraining spending. Total ministerial spending will increase by a modest 1.4 per cent in 2013/14. Most departments, however, will experience a freeze or a slight decline in spending with the exception of health, where spending will increase by 3.9 per cent.

The problem is that the Liberals chose to increase taxes as part of the deficit solution. Worse, the taxes raised will impair BC’s competitiveness and in doing so, reduce economic growth in the future and the jobs that come along with it.

Specifically, the Liberals propose to increase the corporate income tax rate to 11 per cent one year ahead of schedule (effective April 1, 2013) and to introduce a new top personal income tax rate of 16.8 per cent on income over $150,000.

The Liberals have indicated that the new personal income tax rate is only temporary through to the end of 2015, though, as Nobel laureate Milton Friedman used to say, there is nothing as permanent as temporary government programs.

Economic research both in Canada and internationally have consistently demonstrated that investment, work effort, entrepreneurship, and business development are sensitive to corporate and personal income tax rates. By increasing both, BC has reduced the incentives for these beneficial activities in the province.

In addition, BC is now distinctly uncompetitive with respect to personal income taxes and to a lesser extent, corporate income taxes. British Columbia’s top personal income tax rate, which affects skilled professionals like doctors and engineers, business owners, and investors – all people we want to attract to the province – is now 68 per cent higher than Alberta’s comparable rate: 16.8 per cent vs. 10 per cent. In addition, our neighbour to the south, Washington State, with whom we also compete, maintains no personal income tax whatsoever.

The increase in the corporate income tax is relatively small except when combined with the return of the PST, which applies to business inputs and therefore increases costs. The combination of both policies will impair B.C.’s tax competitiveness.

The tax increases were put into place to balance the budget and ensure that we are not burdening the next generation of British Columbians with increased debt. And while the budget was “balanced”, the provincial debt continues to increase unabated. The reason for this seeming contradiction is that BC separates its annual or operating budget from its capital budget.

In 2013-14, for example, the BC government will balance its operating budget but increase its total borrowing by some $6.6 billion. Government debt as a share of the economy will increase from 24.9 per cent to 26.9 per cent.

Indeed, over the course of the three years included in the budget plan, BC’s total debt will grow to $69.4 billion in 2015-16 from $56.1 billion today.

Beyond the longer term risk of accumulating debt, there is also a short-term risk of debt-servicing costs, i.e. interest. BC will spend $2.5 billion in 2013-14 on interest costs, which is money not spent on health, education, or infrastructure. The risk is that interest rates increase and the cost of maintaining existing debt also increases, which will squeeze spending on other priorities.

While the BC Liberals are rightly trumpeting a balanced budget, there are problematic aspects of the budget to recognize. The 2013 budget has made B.C. less attractive for investment, skilled and educated workers, and entrepreneurs. As a result, the province’s economic future looks less bright.

 

Jason Clemens and Niels Veldhuis are economists with the Fraser Institute.