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Five Things You Should Know about BC Budget 2013

By Jock Finlayson

The BC government’s operating deficit for this year is estimated at $1.2 billion, less than 3% of the pan-Canadian deficits from the national and all provincial jurisdictions

Governments across the country have been posting substantial budget deficits since the global recession and financial crisis of2008. For the current fiscal year, 2012-13, Ottawa and the ten provinces combined are on track to run deficits amounting to $46 billion, according to a recent analysis by TD Bank economists.

BC’s net debt equals 17% of GDP, the third lowest debt-to-GDP ratio in the country

For any government, the most important indicator of long-term fiscal sustainability is not the operating deficit/surplus, but the net or “taxpayer-supported” debt measured relative to the size of the economy, or GDP. For British Columbia, the net debt equals 17% of GDP. A decade ago, the net debt/GDP ratio stood at 20%. Among the ten provinces, BC has the third-lowest debt/GDP ratio, after Alberta and Saskatchewan. Quebec and Ontario are grappling with much heavier debt burdens (50% and 40% of GDP, respectively). BC’s relatively low net debt is a key reason why the province enjoys a top-tier credit rating.

According to Budget 2013, the BC government intends to limit the growth of program spending to just 1.5% per year over the next three years.

Health spending is slated to climb by 2.6% per year, which means smaller spending boosts or small decreases for most other Ministries. The planned spending increase of 1.5% per year represents a very modest growth rate, since the province’s population is increasing by at least 1% per year and annual inflation is expected to average around 2%. In fact, under the spending plan outlined in the new budget, government program expenditures would be declining over the next three years on an inflation-adjusted, per person basis.

Capital spending is expected to fall from $6.8 billion this year to $6.2 billion in both 2013-14 and 2014-15.

Capital spending is an important component of the budget, albeit one that tends to receive less attention than the operating spending done by provincial Ministries and agencies. Budget 2013 projects a modest decline in total provincial public sector capital outlays. The $600 million reduction reflects the completion of a number of significant capital projects (e.g., the Port Mann bridge).

Despite a one percent increase in the general corporate income tax rate (CIT), BC will continue to have a competitive CIT compared to other North American jurisdictions – however, the timing of this increase poses a risk for our overall competitiveness

Budget 2013 announced a number of tax hikes, including a 1 percentage point increase in the general corporate income tax rate (from 10% to 11%). This is projected to generate roughly $200 million per year in additional revenue for the provincial treasury. Even with the increase, BC will continue to have a competitive corporate tax rate compared to other provinces and US states. For the Business Council, the problem with the government’s decision to adopt a higher corporate tax rate is primarily one of timing: this measure comes at the same time as BC is poised to shift back to the former retail sales tax, once the HST is eliminated (effective April 1, 2013). For the business community as a whole, returning to the retail sales tax will increase the tax-inclusive cost of producing goods and services in British Columbia by $1.5 billion per year. On top of this are additional sales tax compliance costs in the range of $150 million per year, as the administrative efficiencies flowing from harmonization with the federal GST disappear. Taken together, the higher corporate tax rate, and the extra costs associated with the return to the PST, will increase costs for BC companies by almost $2 billion per year – a punishing blow to the province’s competitiveness.