Wednesday, December 20, 2017

Carole James’s Big Budget Problem

(Belatedly posting my recent Tyee column.)

Finance Minister Carole James put a good spin on this week’s quarterly update on the province’s finances.

But the update highlights big problems the NDP government faces in crafting its first budget, due in mid-February. Without tax increases, the government won’t be able to deliver on its election promises or provide the changes supporters expect.

The September budget update — a mini-budget — didn’t include funding for some campaign promises, like $10-a-day child care, the promised $400 a year for renters or thousands of new affordable housing units. There wasn’t enough time given the delay in forming government, James said.

But there also wasn’t enough money. And the challenge will be greater next year.

This September mini-budget set out a three-year forecast of revenue and expense.

For fiscal 2018, the government is forecasting $150 million in additional revenue — less than one-third of one per cent. (The budget numbers are easier to grasp if you knock six zeros off them. Imagine a family with an income of $52,407 and big expectations with an extra $150 to spend next year.)

Population growth is forecast at 1.2 per cent, and inflation will be about two per cent. So the government would need to spend about 3.2 per cent more just to keep providing the current services. That would be about $1.7 billion, compared to the expected $150 million increase in revenue.

And that is before introducing things like the $10-a-day child care plan or addressing real problems the New Democrats identified in opposition — actions supporters are expecting.

The September update also forecast expenses for next year. The plan calls for nine of the 20 ministries to have their budgets frozen. Two — environment and labour — would see spending cuts. Five — including the ministries of children and families, housing and education — would have spending increases of one-half of one per cent or less.

I’d thought the numbers might be just placeholders, in part because BC Liberal budgets so often underestimated revenues by huge margins. Last year, for example, the Liberals budgeted for a $264-million surplus and ended up with $2.7 billion. (If they had budgeted more accurately/honestly and spent half that surplus addressing issues that rankled voters, the Liberals would probably still be in government.)

But the quarterly update killed that kind of optimism.

The numbers for the first six months of the fiscal year weren’t terrible but neither were they great. Revenue is now expected to fall short of the projections in the new government’s September budget update by $283 million, mostly because of lower income tax payments from the federal government and ICBC’s poor financial performance. Expenses are on track with the update’s projections despite a $152-million budget overrun in fighting forest fires.

Any hope that projections for this year and next were overly conservative and the new government would have more fiscal room was snuffed.

The biggest challenge is former premier Christy Clark’s reckless pre-election move to cut Medical Services Plan premiums in half for people with a household income under $120,000, announced in the Liberals’ February budget. But it doesn’t take effect until Jan. 1, so revenues are only reduced for the last three months of this fiscal year, which ends March 31.

But next year, the change will cost the government more than $1.2 billion in lost revenue.

Cutting MSP premiums is sound policy. The premiums, which the Liberals had more than doubled, were a regressive way to pay for health care. A family with $40,000 in income paid the same amount as the richest British Columbians. Covering the costs through income taxes — like most provinces — would be more equitable.

But the Liberal budget didn’t introduce any tax increases to cover the lost revenue. It just pushed the problem into the next year and hoped no one would notice the ticking time bomb.

All of which leaves the NDP government facing three choices.

It could try to cut expenses to fit the projected revenues. In her briefing on the quarterly update, James noted, “A number of our promises are longer term and implemented over a number of years.” That leaves room to make a small start on promised affordable housing and child care. Premier John Horgan has also talked about the importance of federal funding. But really, after 16 years talking about the Liberals’ failure to spend in critical areas, the new government can’t manage in the same way.

It could choose to run a deficit, spending more than it took in and leaving the debt for future taxpayers. But beyond political expediency, there is no justification for deficit budgets when the economy is performing this well.

Or the budget could increase taxes. The September update included an increase in the corporate tax rate from 11 to 12 per cent and a bump in income tax for people being paid more than $150,000 a year from 14.7 per cent to 16.8 per cent. But that’s not enough to make up for the $1.2 billion in lost revenue from the MSP change.

The government has appointed a three-person panel to provide advice on ways to replace MSP revenue and allow the full elimination of premiums within four years.

Pragmatically, tax increases make sense. If you’re cutting MSP premiums, you need to find revenue to pay for critical public services somewhere else.

And the NDP platform, which promised the eventual elimination of the health care premiums, said a “non-partisan MSP elimination panel will advise on how to protect health care funding, while phasing out this unfair flat tax.”

The anti-tax lobby has been successful in turning the idea of any tax increase into anathema.

There are no easy choices for the government, and lots of political risks.

But British Columbians voted — barely — for change. Which means tax increases and investments in a better society, despite the political risks.