Financing NDP’s agenda will be a major challenge for taxpayers

The $52 billion “mini-budget” presented by Finance Minister Carole James on September 11 signals a shift in the priorities of the provincial government after 16 years of generally tight-fisted rule by the BC Liberals. For the finance minister and her BC NDP colleagues, it is time to boost expenditures on social services, education and affordable housing – while still keeping the operating budget in surplus. Skinny surpluses in the range of $250 million are projected for each of the next three years, on the heels of the $2.7 billion torrent of black ink posted in 2016-17.

The updated budget incorporates the financial consequences of recent government decisions to remove tolls on the Port Mann and Golden Ears bridges, increase income and disability assistance rates, drop fees for adult basic education and English-language instruction and halt the George Massey Tunnel replacement project. There is also a sizable financial commitment to address the fentanyl emergency. In the short term, the cost of fighting forest fires will absorb an extra $668 million in 2017-18.

On the revenue side, the NDP is moving to hike corporate income and carbon taxes while trimming B.C.’s small-business tax rate, starting the phase-out of Medical Services Plan (MSP) premiums and sticking with the previous government’s promise to remove the provincial sales tax from business purchases of electricity (a welcome step). Individuals earning more than $150,000 a year will face a new, higher top income tax bracket effective next year. As a result, the highest combined federal-provincial income tax rate climbs to roughly 50%, a six-point jump from two years ago.

For the business community, the financial implications of the government’s suite of revenue measures vary across industry sectors. Most smaller companies should come out (marginally) ahead. For many large and mid-sized B.C. companies as well as the natural resource and manufacturing sectors collectively, however, the net impact will be higher government-imposed tax costs and reduced competitiveness. This mainly reflects the NDP’s plan to push up B.C.’s carbon tax by $5 per annum over the rest of the decade – leading to a cumulative increase in tax-inclusive energy costs for B.C. businesses of several hundred million dollars by 2020. Unfortunately, the finance minister outlined no plans to temper or offset the effects of escalating fossil fuel costs on B.C. exporters and the energy-intensive resource and manufacturing industries that are already struggling to manage the steepest “carbon price” in North America.

Looking ahead, the government faces significant challenges as it starts work on the full budget and revised fiscal plan to be unveiled next February.

The biggest is how to finance the NDP’s ambitious medium-term policy agenda (universal subsidized child care, a new renters’ rebate, the elimination of MSP premiums, a major expansion in the stock of affordable housing, etc.), without resorting to ruinous income tax increases and/or returning to structural budget deficits. An unusually buoyant economy has fostered a misleading impression of B.C.’s underlying fiscal health. As economic growth slows from 2016’s unsustainable 3.6% pace to something closer to 2% by 2018 or 2019, it will be a tough slog to find the revenue to fund more expansive public services, affordable housing programs and income transfers.

A second major challenge is how to keep B.C. competitive for new investment and business growth, especially as government-imposed costs continue to rise. It cannot be overlooked that most American states not only have rejected carbon pricing – meaning they enjoy appreciably lower energy costs than B.C. does – but also are using generous financial inducements to attract large greenfield investment. Some estimates put the value of state and local government company-specific incentives at US$80 billion a year. Coupled with uncertainty over the future of North American Free Trade Agreement, all of this risks tilting the investment playing field in favour of American locations when large and mid-sized companies consider where to deploy their next dollar of capital or site their next production facility.

Finally, B.C. policy-makers should be thinking about how to leverage the province’s strengths in technology, data, digital talent, health research and geographic proximity to the dynamic U.S. West Coast to build a more productive and diversified economy. Last week’s budget indicated that the government will soon appoint an innovation commission with a mandate to support the advanced-technology sector. Innovation policy should not be limited to growing B.C.’s high-technology industries, which directly account for approximately 8% of GDP. The focus should also include identifying ways to accelerate the take-up of advanced process technologies and improve performance across the wider business community.

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer.