B.C. Budget 2017: Government to phase out MSP and PST on power

Provincial budget earmarks $14 billion in capital works spending over three years

Finance Minister Mike de Jong said B.C. is in such strong financial shape the province can afford to scrap the PST on power sales | Shutterstock

The B.C. government will begin phasing out the provincial sales tax on electricity this year and Medical Service Plan (MSP) premiums in 2018 – provided it gets re-elected in May.

It will also cut the small business corporate income tax rate by half a per cent, from 2.5% down to 2%, effective April 2017.

In a pre-election budget that contains record capital spending, Finance Minister Mike de Jong announced Tuesday February 21 that B.C. is in such strong financial shape that he can afford to scrap the MSP and PST on power sales, spend a record $13.7 billion over the next three years on schools, hospital, roads and bridges, and aim to whittle the government's operating debt down to nothing by 2020.

Strong economic growth in B.C. has boosted provincial government revenues. The government posted a $1.5 billion surplus at the end of fiscal 2016-2017 – the fifth consecutive surplus - which gives it the latitude to cut taxes and increase spending and still project an operating surplus of nearly $300 million in fiscal 2017-18.

NDP Leader John Horgan said Tuesday’s budget is an attempt to make up for years of “endless hikes” to MSP premiums and hydro bills, and starving public services. Since Premier Christy Clark was elected, Horgan said the average family in B.C. has paid $1,000 more just for electricity, MSP premiums and ICBC insurance.

“She wants people to forget that she hit them with endless hikes to Medical Services Plan premiums, rising hydro bills, skyrocketing housing costs, a crisis in child care affordability, and the worst wage growth in Canada," Horgan said.

He added the boost to education funding comes after years of under funding.

“Fifteen years of cuts from our kids’ classrooms, and robbed an entire generation of children of opportunity — and Christy Clark says ‘Forget about it.'

“The B.C. Liberals are using their cash surplus to make you forget there’s a deficit in the services people care about. The only thing Christy Clark cares about is winning the next election. After years of neglect why would anyone believe she is going to change now?”

The surplus that the government is ending fiscal 2016-17 with is nearly $800 million less than the $2.2 billion it was projecting at the end of the second quarter of 2016. A big chunk of the expected surplus was eaten up with a $317 million increase in spending for ICBC insurance claims.

For B.C. businesses, the most significant budget item is the phasing out of the PST on electricity, which was one of the recommendations made by the government's Commission on Tax Competitiveness.

The price of power has surged in recent years, putting large industrial power users at risk. Budget 2017-18 will phase out the PST on electricity sales, starting in October 2017, when it plans to reduce the PST on power sales from 7% to 3.5%.

In April 2019, the PST on power will be completely phased out. Phasing out the PST on power will cost the province $164 million in foregone revenue.

It will forgo even more revenue - $1 billion – when it eventually eliminates the MSP, which de Jong stated as an “objective” he can't yet fullfill. Starting in 2018, it will be cut in half.

In the past de Jong has said that the MSP premiums were important reminders to British Columbians that health care isn't free.

Asked about his sudden change of heart, de Jong told reporters in a pre-budget speech presentation that every time he has pointed out that B.C. has the lowest tax personal tax rates in B.C., critics point to B.C.'s hidden tax – health care premiums.

“A significant number of British Columbians remain very, very troubled by the fact that we have this charge, this MSP premium, that doesn't exist elsewhere in the country,” de Jong said.

MSP premiums will be slashed by 50% for families with a net income of $120,000 a year or less.

The reductions won't take place until January 2018.

The 50% cut will mean a person earning between $42,000 and $120,000 will save $450 annually, or $37.50 per month. Two million lower-income British Columbians will pay no MSP at all.

As for capital spending, the government is committing to $13.7 billion in spending over three years for things like transportation infrastructure, new schools and hospitals.

When contributions from the private sector are included, the budget calls for $7 billion in spending on transportation infrastructure alone, including $2.4 billion for the George Massey tunnel replacement.

The government is increasing health care funding by $4.2 billion – a 3.6% increase -- and another $3 billion in other areas such as education.

Health care represents 41% of the total budget, and expenditures will hit $20 billion by the 2019-2020 fiscal year.

The increase to K-12 education is $740 million over three years, which includes the $320 million that the government was forced to pony up after the Supreme Court of Canada ruled against the government's change to class size and composition.

Funding for education in 2017-18 budget is $5.9 billion, up from $5.4 billion in 2013. The budget also includes $2.6 billion in capital spending for colleges over three years.

The Greater Vancouver Board of Trade gave Tuesday's budget top marks for tax competitiveness, fiscal prudence and economic vision.

“There isn’t a government of any political stripe in this country who wouldn’t want to deliver today’s budget,” GVBOT CEO Iain Black said in a press release. “British Columbia continues to lead Canada in terms of financial management and economic strength, giving our business community a stable foundation on which to build."

B.C. leading country in economic growth

B.C. experienced strong economic growth in 2016, leading to higher tax revenues. Employment growth was 3.2%, with 70,000 new jobs created, and new housing starts grew by 33%.

“In terms of how we compare with the rest of Canada, we have been the leaders,” de Jong said.

B.C. also had strong retail sales growth and exports also grew by nearly 13% in 2016 compared with 2015, thanks to recovering copper and metallurgical coal prices (major mining exports for B.C.) and increased demand for lumber in the U.S. and China.

“It has rocketed upwards in levels that we really didn't anticipate that we would see,” de Jong said of B.C. exports in 2016.

The Economic Forecast Council projects the province's GDP growth will be 2.3% in 2017. The government's fiscal plan will use growth rates of 2.1% for its forecasting.

Despite B.C.'s robust economic growth, de Jong cautioned that “a rising tide of protectionism” in the U.S. could negatively affect trade.

“We are still exposed,” de Jong said .”We shouldn't kid ourselves.”

B.C.'s forestry sector continues to diversify its markets, but remains vulnerable to protectionist measures like softwood lumber duties in the U.S.

By the 2019-2020 fiscal period, the province plans to have its operating debt whittled down to $1.1 billion – a 90% decrease from $10.2 billion in 2013-14,which will save the province $500 million in interest costs. De Jong said eliminating the operating debt entirely by 2020 is “within our grasp.”

For the tech sector, the 2017-18 budget includes $40 million to extend broadband in rural areas, and $87 million for an “enhanced technology strategy,” details of which are to be announced at the BC Tech Summit in March.

The government's three-year fiscal plan has the highest ever levels of capital spending -- $13.7 billion for public infrastructure. Capital spending over three years includes $2.7 billion for hospitals and health care, including;

  • $45 million for mental health services;
  • $12 million for 28 additional beds for youth addiction treatment; and
  • $11 million for the BC Centre for Substance Abuse.

On the environment, the budget commits the following funding over three years:

  • $36 million for parks, including new campsites and park rangers;
  • $18 million in increased spending for mine permitting and oversight;
  • $9 million for increased enforcement and compliance under the Ministry of Environment;
  • $27 million for a caribou recovery; and
  • $40 million for the Clean Energy Vehicle program.

nbennett@biv.com