British Columbia must pursue economic growth—BC Budget Backgrounder

Contact:

Jason Clemens, Director of Fiscal Studies
The Fraser Institute
Telephone: (604) 714-4544
Email: jasonc@fraserinstitute.ca

Release Date: 12 March 2001

VANCOUVER, BC— The government of British Columbia must aggressively pursue policies aimed at economic growth or continue to face a growing prosperity gap with Alberta, says The Fraser Institute, commenting on the upcoming BC provincial budget.

Prosperity Divide

There are several key economic indicators that point to an increasing economic divide between the two western provinces (see Figure 1): The British Columbia/Alberta Divide

• Alberta's economy now ranks ahead of British Columbia's in overall size.
• According to numerous projections, including those of most of the major Canadian banks, BC's rate of economic growth will continue to lag other provinces, particularly Alberta and Ontario.
• British Columbia's per capita personal income is now below the Canadian average. BC's per capita personal income of $26,015 is 10.6 percent below Alberta's per capita personal income of $29,107.
• British Columbia's per capita personal disposable income is also below the Canadian average. British Columbia's per capita personal disposable income of $19,666 is 11.1 percent below Alberta's per capita personal disposable income of $22,119.
• British Columbia maintains an unemployment rate of 7.4 percent, nearly 50 percent higher than Alberta's unemployment rate of 5.0 percent.
• Vancouver has slipped from third to fourth place over the last decade in number of corporate headquarters while Calgary has moved from third to second. In fact, on a population-adjusted basis, Calgary is now the number one base for corporate headquarters in Canada.

"These indicators all point to a prosperity gap between the two provinces, one which will grow unless reversed by changing the course of economic policy in British Columbia," says Jason Clemens, director of fiscal studies at The Fraser Institute.

Power of Growth

Alberta is now in the enviable position of spending less as a percentage of the economy but providing more in per capita spending (see Figure 2). Alberta now spends 19.8 percent of provincial GDP which translates into $8,426 per Albertan. British Columbia, on the other hand, spends 25.5 percent of provincial GDP but only provides $7,911 in spending per British Columbian.

"The reason is differing rates of economic growth. Alberta is able to take less of the total economic pie, but provide more for Albertans in dollar terms, because their economy has expanded significantly more than British Columbia's over the last decade," explains Clemens.

Personal Income Tax

Individuals and families face much lower personal income tax rates in Alberta than in British Columbia. The top marginal tax rate for individuals in Alberta is now 39.0 percent, nearly 10 percentage points lower than British Columbia's top rate of 48.7 percent. Alberta maintains a single statutory income tax rate (10.0 percent) while British Columbia has bucked the national trend of simplification and implemented five statutory income tax rates ranging from 8.4 percent to 19.7 percent (see Figure 3). The basic and spousal exemptions are also diverging. In British Columbia, an individual can earn $8,000 tax-free while an individual Albertan can earn $12,900 (61.3 percent more income).

"Alberta's strong fiscal position will allow the province to bring in major tax reductions over the next few years, furthering the tax divide between itself and other provinces, especially British Columbia," says Clemens.

Business Taxes

Alberta currently has corporate tax rates that are 1 and 2 percentage points lower than British Columbia's for general corporations, and manufacturers and processors. However, both Alberta and Ontario plan to dramatically reduce both rates to less than half of BC's current rates by 2005 and 2006, respectively. In other words, while BC's rates are scheduled to remain at 16.5 percent, Alberta plans to reduce its rates to 8.0 percent by 2005. Ontario plans to reduce its rates to the same level by 2006.

Alberta does not levy a capital tax on non-financial corporations and plans to eliminate the capital tax for financial corporations. British Columbia plans to continue levying these highly distortionary and damaging taxes.

Finally, both Alberta and Ontario plan to drastically reduce their small business tax rates, completely eliminating any advantage British Columbia may have had in this area.

Why Lower Taxes?

Lower taxes in Alberta have rewarded entrepreneurialism, innovation, risk-taking, and hard work which have contributed to the positive economic climate enjoyed in the province. In contrast, BC's high personal income tax rates, high corporate income tax rates, and corporate capital taxes punish these activities.

Missing the Point

Some commentators suggest that Alberta's positive economic performance is simply a recent phenomenon based on the success of the oil and gas industries. Such an analysis misses the point that BC's decline relative to Alberta began a decade ago, well before the recent boom in oil and gas prices. Further, it ignores the dramatic increases in corporate and high-tech sector activity in Alberta. It also completely ignores the fact that British Columbia, like Alberta, possesses an abundance of natural resources.

"Alberta has chosen to build on their natural advantages while BC has stifled ours through high taxation and heavy regulation," says Clemens.

Recommendations

The following general recommendations are based on an upcoming Fraser Institute publication, Returning British Columbia to Prosperity.

1. A reduction in the size of the provincial economy consumed by government spending. The size of reductions needed to achieve this necessitate reductions in core areas of government spending.
2. Spending reductions should be accompanied by major restructuring of how the province delivers services so that service quality can be improved while costs are reduced.
3. A series of tax reductions and eliminations, including:
   1. elimination of the top two statutory personal income tax rates;
   2. a minimum 20 percent across the board reduction in the remaining three personal income tax rates;
   3. corporate income tax rate reductions to 8.0 percent by 2005 to match those planned in Alberta and Ontario (by 2006);
   4. immediate elimination of the corporate capital taxes;
   5. harmonization of the provincial sales tax with the GST as soon as possible.

"If British Columbia is serious about closing the prosperity gap between itself and Alberta and returning to a position of economic leadership in Canada then a series of spending and tax reductions must be announced in the coming budget," concludes Clemens.

The new study Returning British Columbia to Prosperity will be published on March 20.

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