Blogs & Comment

B.C.'s stability a gift for Christy Clark's new economic mandate: Kevin Milligan

Targeting debt reduction.

Christy Clark and the B.C. Liberal government begin a new term facing a propitious fiscal situation, arguably second in Canada only to Saskatchewan. Net debt as a share of GDP is low (only Saskatchewan and Alberta’s are lower), and B.C. has a shot at balancing the budget in 2013-14 – along with Saskatchewan, Quebec, and Nova Scotia. The Liberals made a few big-ticket election campaign spending promises, but, on the tax side, they also indicated they intend to pad revenues over the next few years with higher tax rates for personal and corporate income. In short, the new government has much freedom to work on new projects without having to fight festering fiscal fires.

That said, budgets must still be watched, lest the current advantages be frittered away. Below, I outline the main challenges on both the revenue and expenditure sides.

Political historians may be able to recall a party winning an election with a promise to increase taxes, but this economist cannot. Yet, the B.C. Liberals just pulled off the remarkable feat, with February’s budget promising $327 million in new taxes for 2013-14 and a further $585 million-worth in 2014-15. In addition, the government plans $625 million in asset sales over the next two years. Together, these revenue increases are projected to be sufficient to balance the budget in each of the next three years. Some have raised doubts about the likelihood of the asset sales coming to fruition. However, even in the absence of that one-time boost, the projected trajectory of revenues is such that by 2015-16 the budget should generate a surplus of over $700 million. While a balanced budget in 2013-14 is not assured, in the medium run revenues do not appear to raise serious challenges.

That’s as far as revenue levels — then there’s the question of how the B.C. tax system is structured. Restructuring could mean a big operation like overhauling the sales tax to make it more efficient, or shifting the mix of taxes among the different revenue sources. That’s unlikely to happen though. The surprise HST announcement following the 2009 election left deep political scars and made further any tax system shake-ups unlikely, at least in the near term. Besides, the 2013 election campaign featured no discussion of tax restructuring, so the government doesn’t seem to have a political mandate to tackle any serious structural reforms.

But even if large-scale tax reform is off the table, the Liberals might still have latitude to bring about some incremental improvements. Health premiums charged to B.C. families, for example, would be a good target. Over the last 12 years, the province has seen a big shift toward higher Medical Services Plan premiums. For a family making $30,000, these premiums weigh in at a hefty $1,596 per year, an increase of 85 per cent since 2001. And the burden of this tax is heaviest on middle income families, which seems unfair. Making B.C.’s health premiums more geared to income, like Ontario’s health premiums, would be a good place to start.

Let’s move on to expenditures now, which I suspect will dominate the Liberals’ attention over this term. Provincial governments spend a large share of their budgets on health and education, so long-term fiscal sustainability rests on those items more than anything else. February’s budget promised to hold overall expenditure growth at 1.5 per cent per year and health spending at 2.6 per cent. While that’s not impossible, achieving this kind of expenditure control will require difficult choices and continued restraint in terms of public sector compensation. This restraint presents the greatest risk to the B.C. Liberal budget plan.

Premier Clark spent the election campaign expounding her dream of a debt-free B.C. fueled by resource-driven economic growth. Many expressed doubts about the plan, but whatever its merits that’s the one that has received electoral endorsement. B.C.’s relative fiscal stability affords Clark and her government the opportunity to spend their time pursuing their chosen agenda rather than satisfying the needs of the bond market. Whatever happens next, that’s a good place to be when you’re starting out.