Tuesday, September 01, 2009

The six things you need to know about this budget

From inside the budget lockup, six things you should know about the Liberals' latest effort.
First, the February budget has been revealed as bogus. The deficit is now forecast at $2.8 billion, not the $495 million Premier Gordon Campbell promised during the election campaign. (That would be a record splash of red ink.) The deficit is forecast to shrink to $1.8 billion next year and $1 billion the year after.
Second, most British Columbians are going to face tax increases.
This gets complicated. For starters, MSP premiums are going to increase by six per cent a year over the next three years. (At the same time, the MSP exemptions for people with low incomes will be increased. Generally, single people with incomes under $30,000 and families with income under $40,000 will get breaks.)
Then there is the HST. Finance Minister Colin Hansen's presentation pitched the benefits of the new tax. He promised more investment, job creation and cheaper goods for consumers.
Hansen announced exemptions and tax breaks intended to cushion the blow. The new tax won't apply to home energy use and municipalities and charities will get breaks.
People with a low enough income to qualify for the GST tax credit will also get an HST credit - a family with less than $25,000 in income will get $230 per person.
The basic personal tax credit will also be increased to $11,000 from $9,373, saving a typical taxpayer about $70. (Though the MSP increase will claw that back by next year.)
But most British Columbians will pay more because the new tax applies to so many things that were PST-exempt.
The PST now takes in about $5 billion a year. The new HST won't apply to most business purchases, saving companies $1.9 billion a year and reducing the province's take by that amount.
But even with that loss, the government says it will still take in $5.6 billion from the new tax - $600 million more than it gets from the PST.
That means consumers will be paying a lot more to provide the increased revenue and make up for the lost revenue from business. (The government's theory is that companies will pass some of their cost savings on to consumers.)
Third, there won't be too many more surprises this year. The government's efforts to cut or control spending have mostly been revealed - slashed grants to organizations across the province, limits on health spending that will mean longer waits. The discretionary grants have been chopped by 30 per cent - $354 million that won't be going out to communities for services and programs and care.
Fourth, the government has set the stage for a couple of years of further cuts. Health expenditures are set to increase at about six per cent a year.
But after a small increase this year, the government plans cuts to non-health spending in each of the next two years.
On an abstract level, that can sound appealing. But the Environment Ministry budget, for example, is forecast to be cut by 20 per cent by the 2011/12 budget year. That means job losses, reduced park access and other much less popular measures. The Children and Families Ministry budget is frozen for two years, even as social problems rise. Across government, about 1,400 jobs are to be eliminated over the next two years.
Fifth, about the only major expansion of government services will be the introduction of full-day kindergarten, which will be available across the province by 2011.
Sixth, and last, the wild ride is not over. The budget is based on the assumption that the recession has bottomed out. The government is projecting a 2.9 per cent slump in the economy this year, followed by growth of 1.9 per cent and 2.7 per cent in the next two years. That's based on a conservative approach to the forecast from a panel of independent economists. But it's also, as we've seen in the last 12 months, a risk.
Stay tuned.
Footnote: The budget forecasts continued tough times for the forest industry and provides little increased aid for communities dealing with the long-term impact of pine beetle devastation. It was generally praised by business groups and panned by unions and health and social service advocates.


Anonymous said...

CBC has Bob Plecas on: 'Whoever wins the first 24 hours (after budget is tabled), wins the spin.'

Dawn Steele said...

I'd assume that given all the heightened uncertainty, the size of the contingency cushion is up significantly from that of previous years?

(Unlike the recent pre-election Fudge-Budget, for example, which claimed a $500 million deficit via the simple ruse of eliminating the hefty contingency allowance at the very time that uncertainty about budget costs and revenues was greater than ever.)

paul said...

There is a forecast allowance, but much smaller than in the past - $250 million. There is also a $500 million contingency allowance.
Colin Hansen was asked why a forecast allowance now and not in the February budget, but didn't answer.
It's a reasonable allowance, I'd say. Some of the earlier huge cushions seemed designed to ensure a big surplus at year-end.

Dawn Steele said...

So, with the level of contingency now deemed fiscally prudent, the pre-election deficit should actually have been pegged at something like $1.2 billion - even if there was no reason to revise the revenue projections?

I know it achieves no good to keep on about these things, but it does reassure me that I'm not the one who's nuts.

Anonymous said...

As it was you Paul who first raised the topic of increasing MSP fees in a former article you did here I was convinced by you that this was a good thing to do. Do you still support the raised MSP ?

Norm Farrell said...

If you are a parent, don't count on all day kindergarten in 2010. BC Liberals pulled the $110 million fund for building maintenance and upgrades so districts are unable to keep up with day to day needs. Without added funding, there will be no added programs.

This is one of those political footballs that will get booted down the field year after year. Like the national daycare program that has been pending for decades now.

paul said...

I'd forgotten that I had written about raising the MSP. I just used it as an example of a way to increase revenue to cover health costs.
From a policy point of view, raising the same money through the income tax system would be fairer.
But practically, the Liberals weren't going to do that. The MSP premiums, along with the increased exemptions for low-income British Columbians, are a reasonable alternative.

Dawn Steele said...

You know the shift we've seen since 2001 from income taxes and corporate taxes to taxes based on consumer spending and commodity revenues raises some questions about fiscal stability, especially in light of what we're seeing in the US.

In Florida, where they don't have any state income tax, government revenues based mainly on property and sales taxes were fine as long as people kept pouring into the state and spending billions setting up new homes. But the economy has now crashed spectacularly, with population outflows for the first time in almost a century threatening a deepening downward spiral. As worried residents reign in spending and property values dive, state govt revenues have crashed even more spectacularly.

BC has some similarities in that a significant portion of our economic growth and provincial revenue base is based on consumer spending derived from population inflows. We also rely heavily on revenues from resource extraction, just like Alberta, which makes our economy therefore especially vulnerable to global boom/bust cycles.

If our provincial tax base increasingly relies on consumer spending and resource revenues (vs. income taxes), wouldn't this make the provincial government more vulnerable than ever to even bigger cyclical budget surpluses and deficits?

It also makes government more vulnerable on the spending side of the budget. The biggest ticket item in the current budget is the $14 billion in "corporate welfare" to keep the construction industry going through the downturn. Not to mention all the money propping up forestry etc.

Can British Columbians afford to increasingly cover these enormous costs via consumer spending alone? Surely the industries themselves need to adopt some fiscal discipline by investing a greater share of their profits during the boom cycles so that we're not raiding health and education to prop them up during the downturns?