Hansen Has Wealth of Choices

After setting the record for the largest deficit in B.C. history two years ago, the provincial government is about to close out 2004-'05 with B.C.’s largest-ever surplus, anticipated to be over $2 billion.

Welcome to the rollercoaster that is the B.C. economy (and thank the feds, whose increased transfers for health and equalization get the largest share of the credit for this dramatic turnaround). The outlook for 2005-'06 and 2006-'07 is for somewhat smaller surpluses (but still large by historical standards) of approximately $1.4 billion.

B.C.’s surpluses give us an opportunity to take stock of what has happened over the past few years, and to make important choices about our priorities in the future.

With a pre-election budget to be tabled on February 15, the Canadian Centre for Policy Alternatives just released our annual BC Solutions Budget. We outline a series of options for spending priorities and how to pay for them. The goal, as with all our alternative budgets, is to show what is possible. Budgets are about choices, and whoever forms the next government can choose to substantially boost spending on programs that allow us to take better care of one another and the environment.

‘Vulnerable’ pay for success

Our key recommendations for the 2005/06 budget are that:

• the government not use the surplus to pay down the provincial debt;
• the government not lock spending cuts into place with further tax cuts;
• at a minimum, the entire underlying surplus be spent on restored public programs; and
• additional revenues be raised by reversing upper-income tax cuts from 2001.

The context for the 2005 budget is a substantial downsizing of B.C.’s public sector over the past three years. The province has also seen significant shifts in who pays for public services.

• Schools and health care facilities have been closed around the province;
• Spending outside health and education is down significantly. In total, $1.7 billion has been cut over the last three years from program areas such social assistance, children and families, environmental protection, forestry and transportation;
• Across the broad public sector, over 20,000 jobs have been eliminated or contracted out;
• Viewed as a percentage of GDP (i.e. relative to the province’s annual income), all parts of the public sector are in decline, even health care.
• The brunt of the cuts has been experienced by the most economically and socially vulnerable people in the province. Yet, as the new surplus clearly shows, all of the pain and hardship associated with these cuts was unnecessary. There was no “structural deficit” that necessitated spending cuts.

The combination of income tax cuts in 2001 that disproportionately benefited high-income earners and subsequent MSP premium hikes has shifted the task of paying for public services from upper- to middle- and modest-income earners. This shift is reinforcing rising inequality in market incomes.

Investments ‘indict’ tax-cut strategy

Arguably, B.C.’s sweeping policy changes may have been worth it, if one could point to a strong economic payoff.

But the bright spots in the B.C. economy are not a tax cuts story –– they are driven by high commodity prices and demand for B.C.’s resource exports and by low interest rates. Capital investment outside residential construction, in contrast, has shown little improvement –– a major indictment of the government’s tax cut strategy. Thus, the province has experienced a great deal of pain for minimal gain.

The hot topic for the 2005-’06 B.C. budget is what to do with the anticipated surplus. Sadly, it is not at all obvious, even in an election year, that this projected surplus will be rolled back into spending. Pressure is mounting from the corporate sector to use the surplus to further reduce taxes and to pay down provincial debt. This would be a mistake.

There is no reason why the surplus should be directed towards debt reduction or tax cuts. In spite of large deficits in recent years, B.C. still has a healthy fiscal situation. The province is on track to close 2004-’05 with a debt-to-GDP ratio of 19.2 percent — exactly the same as it was in 2000-’01 and second-lowest among the provinces after oil-rich Alberta. B.C.’s tax structure is already more than “competitive” with other jurisdictions. B.C. has the lowest taxes in Canada for most income groups. We are greatly concerned that further tax cuts would lock in place the deep spending cuts of recent years.

We feel the opposite course is needed: the surplus must be used to undo the damage done and reinvest in the public sector.

Education requires ‘reversal’

Our Solutions Budget also proposes major new investments in education, from early childhood right through to post-secondary education and apprenticeships, and a comprehensive anti-poverty strategy. Some of this can be paid for from the existing surplus, but if we truly want to meet the needs of the province, more revenue must be raised. For this reason, we believe that some of the 2001 tax cuts must be reversed.

For example, reversing the 2001 tax cuts for the top two brackets would increase provincial revenues by $370 million (and would only affect to top 5 percent of taxpayers). That money could fund an anti-poverty strategy, and would also allow us to take a giant leap towards a comprehensive early childhood education and care program.

Likewise, by reversing the tax cut for the third tax bracket, and by scaling back some of the 2001 corporate tax cuts, we could fund a major expansion of advanced education.  The transformation of B.C. into a high-knowledge, service-based economy requires that a greater emphasis be placed on education than in the past. Moreover, a looming skills shortage has frequently been cited by both business and labour leaders as an important priority for the province.

But such an ambitious education agenda requires that business step up to support new investments from which they benefit. We propose that this take the form of a new corporate payroll tax for training and education to raise an additional $370 million in operating revenues.

Critics will paint these proposals as radical. But even our full package of enhanced spending is well within historical norms. It is the shrinkage of the public sector in recent years that is truly radical. Even if the government adopted every one of our recommendations, all B.C. individuals and businesses would still be paying less in taxes than they did in 2000.

Some will argue that higher taxes and public spending is a recipe for economic disaster. But other places in the world have made choices to greatly reduce poverty and to make investments in people without the economic sky falling down. Reinvesting in public services is not an illusive dream; through a common commitment we can make it a reality. This is the conversation that British Columbians need to have.

Seth Klein is the B.C. director of the Canadian Centre for Policy Alternatives. Marc Lee is the centre’s economist.