Is this the right budget for BC’s business community at this time? No ~ Not the Right Recipe for BC’s Economy

With BC facing a recession, the provincial government had good reason to re-focus on the economy in its 2009 budget. Unfortunately, the government did not make the tough decisions required to make British Columbia more competitive and attractive for investment and business development.

For starters, little was done to improve incentives to work, invest and take entrepreneurial risks. Reduced personal income and business taxes would have improved these incentives and provided a stronger foundation for wealth creation now and in the future.

There were no new reductions in personal income tax rates contained in the budget. As a result, BC’s top three personal income tax rates (10.5%, 12.3 % and 14.7 %) remain higher than Alberta’s single-rate of 10 %. Eliminating the top two personal income tax rates would have resulted in top rate of 10.5 %, closer to that in Alberta. Doing so would have improved the incentives for productive economic behaviour and aided in attracting and retaining professional and skilled workers.

There was also little movement on business taxes, save for the gradual reduction in the corporate income tax to 10 % from 11 % starting in 2010. This reduction was implemented to partially offset the scheduled increase in the carbon tax. The move will improve incentives for business investment but is too little, too late. The government should have immediately reduced its rate to 8 %, giving B.C. the country’s lowest corporate income tax rate, and thus creating a stronger incentive for businesses to invest in BC.

The government also chose not to match the federal increase in the small business threshold to $500,000 from $400,000, which would have benefited small businesses in British Columbia by mitigating the impact of the higher corporate income tax rate they face as they grow.

Finally, the government again failed to address the sales tax businesses pay on inputs which reduces the incentives to invest in capital. A lower rate of capital investment ultimately has negative consequences for productivity and wage growth in the province.

The fiscal room needed to implement these important tax reductions was unfortunately taken up by billions of additional dollars in health spending. All told, health care spending will increase by $2.4 billion over the next three years (2009/10 to 2011/12), a 16 % hike.

The BC government is again refusing to acknowledge that money is not the answer to our health care woes. Money could actually be saved without negatively impacting the quality of health care if BC implemented policies similar to those in Europe and elsewhere.

The BC government thankfully plans to keep a tight lid on total spending. Planned increases in total spending over the next three years (averaging 2.4 % per year) are lower than with average expected inflation plus population growth (3.0 %). However if the past is any indication, the government will have difficultly adhering to its spending plan so perhaps there is less to celebrate here than there might seem at first glance.

Despite the conservative plans for increases in spending, the government is projecting $740 million in deficits over next two years ($495 million in 2009/10 and $245 million in 2010/11). Deficits coupled with significant capital spending financed through borrowing will increase provincial government debt by a worrying $6.4 billion over the next three years, an increase of 23 %. Consequently, a larger portion of provincial revenues will be devoted to interest payments in each of the next three years.

Finally, while the finance minister claims that the budget is “prudent”, there is much less prudence than meets the eye. For example, the government eliminated the forecast allowance that protects the budget against unforeseen developments (typically $750 million per year); reduced contingencies which help ensure fiscal targets are met; and are optimistic with some of their forecasts (i.e. personal income growth). As a result, British Columbians have reason to be concerned about the government’s ability to hit its budget target, especially with respect to the deficit.

Is this the right budget for BC at this time? No, the budget should have set the course for a brighter future for the province. Rather than shovelling billions into health care without regard for reform, the government should have implemented tax relief aimed at improving the incentives for investment and business development giving true stimulus to wealth creation now and in the future.