May 2000 Fraser Forum: Budget Round-Up: BC Stands Alone
The single most important event for a government is the submission of the coming year's budget. It sets out the spending priorities and describes how the government plans to raise sufficient revenue to finance its spending. As the federal government and all but two provinces have handed down their budgets, it is an appropriate time to assess the direction of those financial plans.
There is a glimmer of hope in the rhetoric of every budget speech presented so far. Without exception, every government has discussed the need for tax and debt reduction, coupled with prudent spending. But unfortunately, mere rhetoric is what many of the discussions amount to.
Some provincial governments, notably that in British Columbia, have followed the snail's-pace lead of the federal government in its approach to tax and debt reduction. Rather than hold spending firmly in check, or reallocate spending to priority areas, both the federal and BC governments have chosen to spend now, cut taxes slowly, and reduce debt later (if at all).
As expected, every jurisdiction announced or implemented tax reductions. Most, however, implemented small tax cuts targeted at lower and middle-income earners and small business, and implemented only limited changes in the top marginal tax rates. For instance, the average provincial contribution to the reduction in the top marginal tax rates between 1999 and 2000 was 0.8 percentage points; the federal reduction was 0.4 percentage points.
Balancing the books: An incomplete job
Of the 8 provinces and th federal government, only 4 provincial governments expect deficits for the current year, and 4 provincial governments expect deficits next year. Nominally, BC maintains the highest deficit for both the current and coming year. Conversely, Alberta will post the largest surplus this year, and expects to record the largest next year.
It is worrying that some provinces, particularly BC, cannot balance their finances in a period of rising revenues, low unemployment, low interest rates, and a growing economy. The financial picture of these provinces will inevitably worsen if economic conditions turn sour. These governments will have to take drastic action to balance their budgets in a period of economic downturn, which means that it is imperative that they balance their books now. Further, the net effect for provinces such as BC and Newfoundland that continue to post deficits is the accumulation of ever larger levels of debt, which in turn leads to greater interest costs. This means that more money is required to service the debt of the province rather than provide programs and services.
Red ink caused by overspending
The federal government and all provinces west of New Brunswick plan to increase spending. BC leads with a planned nominal spending increase of 3.7 percent. The largest reduction in planned spending occurs in Newfoundland, which, unfortunately, still expects to operate in deficit after the spending cut.
With so much rhetoric concentrating on prudent spending, it is very disappointing to see most governments continue to subsidize business and support job-creation programs. Such spending should be completely eliminated, with the savings allocated to tax cuts, debt reduction, or other areas of priority spending.
Top marginal taxes remain
As expected, given the amount of attention paid to lower- and middle-income earners, there was very little change in top marginal tax rates. For instance, the average reduction in the top marginal tax rate between 1999 and 2000 for all the provinces was 0.8 percentage points. Newfoundland implemented the largest reduction - a 2.7 percentage point drop - but retained one of the highest overall rates (50.2 percent). Unfortunately for citizens of BC, that province stands alone again having the highest marginal tax rate (51.3 percent) in 2000 with only a marginal commitment to reduce the rate to 49.9 percent in 2001. High marginal tax rates are particularly damaging as they severely dampen risk-taking, entrepreneurship, and innovation initiatives. It is, therefore, critical for the federal and provincial governments to reduce their marginal taxes, particularly for high-income earners.
Indexation and de-linking are welcome surprises
One unexpected area is the move towards reindexing the tax system. Along with Alberta and BC, the federal government announced immediate reindexation in its recent budget. Other provinces, including Saskatchewan and Quebec, committed to indexation within the next few years.
Tax reform, based on de-linking provincial taxes from the federal system, was a major announcement in nearly every provincial budget. Along with this movement was a trend towards reducing the number of tax brackets and increasing the applicable thresholds at which they apply.
Alberta was the most aggressive in simplifying its tax system by announcing a single-rate tax (11%) applied to incomes over $11,620. Saskatchewan introduced 3 brackets with a much higher upper threshold than previously existed - a top rate of 15 percent will apply to incomes in excess of $100,000. Interestingly, even Quebec, which has the most aggressive tax structure in North America, followed the trend towards simplification by reducing the number of brackets from 5 to 3, while at the same time reducing the rates.
BC, on the other hand, introduced 5 brackets, with a top rate of 19.7 percent applicable at $85,000. In contrast, the top income tax rate for Saskatchewan is not only 4.7 percentage points lower than BC's, but applies at an income $15,000 higher than the top threshold for BC.
Conclusion
The budgets' rhetoric points to a positive change in direction. Immediate taxand debt reduction, coupled with prioritized spending will no doubt yield benefits that include increased incomes, growing wealth, better job opportunities, and improved productivity. There is little doubt that many jurisdictions, particularly the federal and BC governments, are making their changes very cautiously. They are so cautious, in fact, that many of the benefits that would have accrued may be lost due to the slow pace of reform and the aggressive actions of our competitors - other governments worldwide. Governments in Canada have embarked on the correct path; unfortunately, many are going about it too slowly.
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