Opinion

In Tight Times, Campbell Gov't Chooses to Help Big Banks

Inept budgeters axed $100 million yearly tax revenue from fat financial institutions. And it gets worse.

By Will McMartin 3 Mar 2010 | TheTyee.ca

Veteran political analyst Will McMartin is a Tyee contributing editor. Read his previous articles here.

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Finance Minister Colin Hansen delivering BC's budget Tuesday

It used to be said of the New Democrats (when they were in government during the 1990s), that, such was their lack of business and financial expertise, they couldn't run a lemonade stand.

Sadly, with Gordon Campbell and his BC Liberals, British Columbia today has a government whose fiscal acumen is so abysmal, so evidently lacking, that they appear incapable of operating any business enterprise of any size.

It must be said that after eight years of manifest incompetence no further proof is required to prove the point, but the budget for fiscal 2010/11 definitively illustrates that this gang is fiscally clueless.

Consider two components of the budget unveiled yesterday by Finance Minister Colin Hansen. Keep in mind that B.C. is in the early stages of a series of sizeable deficits, with the government committed to balancing the province's books at the earliest opportunity.

Why, then, would Hansen willingly surrender tens of millions of dollars in annual revenues in taxes on the country's largest and most-profitable financial institutions?

Moreover, why would he knowingly incur tens of millions of dollars in unnecessary interest charges by deferring federal transfers?

As unbelievable as it seems, it's true. A careful reading of today's budget plan reveals at least two eyebrow-raising policy decisions taken by the Campbell Liberal government.

Unfortunately, those decisions will dearly cost B.C. taxpayers.

Total BC debt to soar

Before examining those two curious policy commitments, let's take a look at Victoria's overall finances. After running five operating surpluses (from 2004/05 to 2008/09), the Campbell government plunged back into the red with a 2009/10 shortfall of $2.8 billion.

Moreover, according to Hansen's latest forecast, B.C. will endure additional deficits of $1.7 billion, $945 million and $145 million in the next three fiscal years, from 2010/11 to 2012/13.

As a consequence of those operating shortfalls, plus a significant ramp-up in capital spending, B.C.'s total provincial-government debt -- which stood at $36.1 billion when the Campbell Liberals won election to government in 2001 (see page 98 here) -- will reach $47.7 billion in the coming fiscal year, and soar to $55.9 billion in 2012/13.

B.C.'s taxpayer-supported debt burden, again according to Hansen's budget, will climb from a low of 13.4 per cent of GDP in 2008/09, to 17.2 per cent in the current fiscal period, and peak at 17.9 per cent in 2011/12. Simply, B.C.'s once-rosy fiscal picture has turned dark, and will remain so for the foreseeable future.

Under such circumstances, one might think that Hansen and his BC Liberal colleagues would be desperate to obtain every legitimately-obtained revenue dollar, and, at the same time, strive to squelch every unnecessary expenditure.

For reasons that only can be described as bewildering, however, that's not the case.

Shutting off $100 million a year

The first questionable Campbell government policy decision regards taxes paid to the provincial treasury by Canada's big banks and other large financial institutions. Tyee readers will recall that Carole Taylor, Hansen's predecessor at the finance department, announced in Feb. 2008 that she intended to phase-out the Corporation Capital Tax over a three-year period.

The tax, which generated $100 million-plus annually for Victoria over most of the last decade, was applied mainly to the country's big banks. Headquartered in Toronto, those banks (and large insurance and trust companies) earn enormous profits in British Columbia, but pay almost nothing in provincial corporate income taxes.

The corporation capital tax was intended to ensure that British Columbians received some small portion of the banks' huge annual profits.

In recent years, however, Ottawa has pressured Canada's provincial governments to abolish their capital taxes, and offered financial incentives to do so.

Taylor succumbed to the federal government's blandishments, and in return for abolishing B.C.'s corporation capital tax, agreed that the province would receive a total of $48 million -- $27 million in the current fiscal period, and $21 million next year -- in compensation.

Adding financial insult to self-imposed injury

Now, some of The Tyee's more-astute readers will question the fiscal and business acumen of a government that knowingly surrenders revenues of $100 million-plus annually -- that's more than a billion dollars over a decade -- for a one-time payment of $48 million.

(Is anyone reminded of the old parable of Jack and the Beanstalk, in which Jack sold his mother's cow for three beans? Poor Jack looks like a financial wizard in comparison to Taylor and her BC Liberal colleagues.)

Still, B.C. could count on the banks to contribute something every year to the provincial treasury. That's because Taylor, at the same time as she repealed the corporation capital tax, introduced a new levy called the Financial Institutions Minimum Tax.

The new levy was intended to ensure that Canada's banks, insurance companies and trusts, all headquartered outside B.C. -- and very, very profitable -- nonetheless would continue to pay some monies (albeit much-reduced than formerly) directly into the provincial treasury.

That minimum tax rate was to kick-in in 2010/11 (the upcoming fiscal period), when the corporation capital tax was completely eliminated. The specific tax rate -- that is, the percentage of each bank's paid-up capital that would be paid in tax -- and total revenues were expected to be revealed by Hansen in yesterday's budget.

Shockingly, they were nowhere to be found. Hansen and his government colleagues, you see, instead opted to repeal the minimum financial institutions tax -- even before it takes effect!

So, two years after deciding to forego most of the $100 million-plus generated annually for the province by the corporation capital tax -- instead accepting a one-time payment $48 million -- the Campbell Liberals now have resolved to let Canada's big banks keep the entire amount and pay nothing to Victoria.

Run a lemonade stand? Please.

Targeting the least vulnerable

That decision by Hansen and the BC Liberals no doubt will please Taylor, who, following her decision to repeal the corporation capital tax and quit politics, accepted an appointment to the board of directors of Canada's second-largest bank, the Toronto-Dominion.

It also will excite the country's largest financial institutions, which, despite the recent global economic downturn, have racked up gigantic operating profits in the year just ended. In 2009, the Royal Bank had an annual profit of $3.9 billion; the T-D, $3.1 billion; Scotiabank, $3.1 billion; the BMO (the Bank of Montreal), $1.8 billion and the CIBC, $1.2 billion.

B.C.'s share of the pie? Nothing.

An HST federal payments switcheroo

The second puzzling Hansen decision involves B.C.'s new Harmonized Sales Tax.

Once again, the issue centres on a one-time federal transition payment. In this instance, it involves a $1.6 billion inducement offered by Ottawa to get B.C. to repeal its seven per cent social services (sales) tax in favour of Ottawa's goods and services tax, which will be applied in this province at a 12 per cent rate.

Last September, Hansen said that B.C. had opted to take the federal monies over a three-year period -- $750 million in 2009/10; $374 million in 2010/11; and $475 million in 2011/12 -- rather than in a lump sum. The timing of those federal payments, Hansen added, was solely at B.C.'s discretion.

But today's budget shows that the Campbell Liberals have decided to fudge the timing of those federal payments. Instead of receiving $750 million in the current fiscal year (which ends on March 31), Victoria will accept just $250 million from Ottawa -- thereby deferring $500 million in revenues to later years.

So, instead of obtaining Ottawa's HST inducements when they're needed most -- now, when B.C.'s fiscal deficit is at its nadir of $2.8 billion -- the Campbell government intends to shove those transfers to some point in the future.

Why ever would they do that? It's simple, really: the BC Liberals believe windfall federal government monies are most-needed -- not at the present time, just after they won a provincial-general election -- but just before the next general election, scheduled for 2013. That way, the Campbell government can be assured of recording a balanced (or surplus) budget when next they face the electorate.

For Liberals' political games, we'll pay $74 million

There's a cost (for taxpayers) to this, of course. Remember, B.C. is currently enduring sizeable fiscal deficits. To cover the immediate shortfall, we either could accept windfall revenues from Ottawa -- that is, the $1.6 billion offered by Ottawa to adopt the HST -- or borrow the monies required to cover the deficit.

By postponing the federal government's HST compensation, Campbell, Hansen and their BC Liberal colleagues have adopted the latter strategy.

Consequently, instead of accepting federal windfall payments immediately, we'll now be borrowing monies to cover the annual fiscal shortfall. And we'll be paying interest on those borrowed monies.

How much will that be? According to this author's calculations (using the Interest Rate Forecasts on page 119 of the government's Budget and Fiscal Plan, 2010/11 - 2012/13, here), the unnecessary interest charges incurred by the Campbell government will cost British Columbians $49.9 million in 2010/11 and $24.4 million in 2011/12. That's a total of $74.3 million over a two-year period.

Failing the lemonade test

British Columbians, it appears, seem cursed to suffer from the ineluctable fallibility of our fiscally-challenged provincial governments. We've seen ineptitude before (and often), but little if anything compares to the manifest incompetence of the current administration.

Unfit to run a lemonade stand? Sadly, Gordon Campbell and his BC Liberals appear incapable of managing even that minor task.

The worst thing is, B.C. taxpayers have to pay for their mistakes.  [Tyee]

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