Budget’s plan for bigger government is irresponsible says The Fraser Institute
Contact:
Jason Clemens, Director of Fiscal Studies
The Fraser Institute
Telephone: (604) 714-4544
Email: jasonc@fraserinstitute.ca
Release Date: 15 March 2001
VANCOUVER, BC— Today’s BC provincial budget does nothing to address the failures of government policy over the last decade, namely increased government spending and taxation, and instead calls for the size of government to increase, says The Fraser Institute.
"Today’s budget is simply irresponsible given BC’s current economic climate," says Jason Clemens, the Institute’s director of fiscal studies. "More spending and no change in tax rates will inevitably cause the prosperity gap between BC and the other 'have' provinces to widen."
More Spending: It Doesn’t Work
Perhaps the most startling aspect of today’s budget is the call for government spending to increase by 7.4 percent over the next year, over three times the rate of growth for the economy. In other words, today’s budget plans to increase the size of government in British Columbia dramatically.
Increases in government spending have characterized the last decade in British Columbia. Between 1989/90 and 1999/00 government spending as a share of the economy in British Columbia increased 11.5 percent. Ontario and Alberta, on the other hand, reduced their provincial government spending as a share of GDP by 2.2 percent and 28.4 percent, respectively.
"The consistent increases in government spending fail to recognize that many of the problems in the current system, particularly health care, education, and welfare, have little to do with the amount of money spent and more to do with how we deliver the services," says Clemens.
The results of this divergence in policy have been disastrous for British Columbia. BC began the decade with real per capita GDP $367 greater than the national average, and ended the decade $3,471 lower. While Ontario and Alberta experienced tremendous growth in real per capita GDP, 16.7 and 26.7 percent respectively, British Columbia languished with a mere 2.1 percent increase in real GDP per capita over the 1990s.
What the Government Should Have Done: Provide Real Tax Relief
What is clearly missing from today’s budget are tax cuts. Rather than undertake large increases in spending, which have shown little or no positive economic effects, the government should have implemented sweeping tax reductions for both individuals and businesses.
Rather than increasing government spending by $1.68 billion, the government should have reduced personal income tax rates by 20 percent across-the-board and eliminated the top two statutory tax rates, making BC’s personal income tax rates more competitive.
The government should also have announced major reductions in corporate income tax rates following the lead of Alberta and Ontario. Alberta and Ontario have already announced that by 2005 and 2006, respectively, their corporate income tax rates will be reduced to 8.0 percent. BC’s rates are expected to remain at 16.5 percent, more than double the rates planned for Alberta and Ontario. Such rate differentials are simply not sustainable in a globally competitive world.
No Improvement in Business Climate
One of the major problems plaguing BC over the last decade has been low business investment. In fact, between 1991 and 1999, the amount of real fixed business investment, net of depreciation, shrank by 13.3 percent. The amount of business investment in BC over most of the 1990s was insufficient to replace existing investments, like plants and equipment. Between 1995 and 1999, British Columbia, on average, experienced a reduction in real net business investment of 4.2 percent while Alberta and Ontario experienced increases of 36.5 percent and 30.8 percent, respectively.
"Part of this under-performance has been caused by a poor overall business climate. BC was ranked last for its business climate in both 1999 and 2000. Announcements in today’s budget and yesterday’s throne speech, including an additional increase in the minimum wage and the expansion of pay equity legislation, will do nothing to improve the negative investment climate currently plaguing our province," says Clemens.
Paper Surplus – Cash Deficit?
Today’s budget indicates a summary account surplus of $1.09 billion for 2001/02. However, total provincial net debt is projected to increase by $850 million, from $33,816 million to $34,666 million. Over the course of the last decade, debt has more than doubled in British Columbia. The government expects to spend over $2.6 billion on servicing the existing debt in the coming year, funds that could have been used for program spending or tax relief. It’s difficult to reconcile a claim of balanced books with increasing debt.
"This budget will do absolutely nothing to restore confidence in the BC economy, stimulate business investment, promote entrepreneurialism, or restore incomes above the national average," concludes Clemens.
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