N.B. takes the lead

Canadian governments looking for ways to improve the economy and emerge from the recession in better position to attract businesses and skilled workers should look to New Brunswick and emulate the plan released on Tuesday by Premier Shawn Graham and Finance Minister Victor Boudreau.

The cornerstone of the budget is significantly reduced personal and corporate income taxes. Moreover, the government is not raising other taxes on consumption to offset these tax cuts.

On personal income taxes, New Brunswick will replace its four tax brackets with just two rates of nine per cent on income less than $37,893 and 12 per cent on income above that amount. As a result, New Brunswick 's top marginal personal income tax rate (currently 18 per cent) will fall from one of the highest in Canada, to the second lowest - behind only Alberta.

The new two-rate system will dramatically improve the province's ability to attract and retain highly educated, skilled workers, and will improve the incentives for people to engage in productive economic activities.

While the new structure will be phased in over the next four years (fully implemented by 2012), the personal income tax cut amounts to $118 million this year (2009/10), which represents a 9.6 per cent cut in personal income tax revenue.

On the business side, the province's 13 per cent corporate income tax rate will fall to eight per cent by 2012. This will give New Brunswick the lowest rate in Canada, lower than the 10 per cent business tax rate offered in Alberta and British Columbia. Having Canada's lowest corporate income tax will greatly improve the incentives for business investment in province.

The budget also matched the federal increase in the threshold for income eligible for the small business tax rate from $400,000 to $500,000, which allows small businesses to grow larger before they face the higher corporate income tax rate. As a number of studies have shown, the enormous increase in the tax rate borne by businesses as they grow and develop results in a significant barrier to growth.

According to Finance Minister Boudreau: [This plan] is designed to promote investment opportunities, economic growth and create jobs... lower taxes for business will encourage New Brunswick companies to stay here and grow and will make New Brunswick an even more attractive plan to do business.

We couldn't have said it better. This is a pro-growth plan.

Of course, no government budget is perfect. Along with the highly productive personal and corporate tax rate reductions, New Brunswick is creating new (and enhancing existing) industry specific tax credits. Actively targeting select groups and preferred industries, however, increases the complexity of the tax system and results in a smaller tax base and higher-than-necessary rates.

In addition, the New Brunswick government will run deficits in each of the next four years, in part as a result of the tax reductions. Specifically, the provincial deficit will amount to $741 million this fiscal year, or 2.7 per cent of GDP.

But balanced budgets are not the end all and be all. More important is the level of government spending and how the government plans to return to a balanced position, through higher future taxes or spending restraint. Fortunately, the N.B. government is planning to focus on its expenditures.

While spending will increase quite significantly this year, the government is planning to restrain annual spending growth to an average of 2.5 per cent over the next four years. Spending will continue to increase every year at a slower pace than economic growth, thereby shrinking the size of the provincial government (relative to the size of the economy) and bringing the books back to balance over time.

The government announced a wage restraint policy that will freeze government wages for two years and eliminate 700 public sector jobs this year. While such restraint is welcome, meaningful spending reductions coupled with program reform aimed at reducing waste and increasing efficiency should also be considered.

Lastly, the N.B. budget could have gone further, as it did not implement the most aggressive options for overhauling the province's tax system outlined last spring by the governing Liberals. For example, the government chose not to implement a single rate personal tax of 10 per cent. Future budgets should focus on decreasing the 12 per cent rate to nine per cent, which would give New Brunswick the country's lowest top marginal rate.

Future budgets should also move towards the five per cent corporate income tax rate option outlined in the province's discussion paper. Doing so would eliminate the tax penalty on growth by equating it with New Brunswick 's small business rate.

Despite its flaws, New Brunswick 's pro-growth budget is infinitely better than the irresponsible and economically-damaging plan put forward by our federal government earlier this year.

Indeed, provincial governments, including Ontario and Alberta, that have yet to present their 2009 budgets should take a long hard look at New Brunswick's budget. Its tax relief plan will provide true stimulus to wealth creation now and in the future.

Mr. McGuinty, Mr. Stelmach and the other premiers, are you listening?