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There's no leisurely repentance for B.C.'s hasty tax cuts

 

By Bruce Little
00:00 EST Thursday, February 21, 2002   


If they had it to do over again, B.C. Premier Gordon Campbell and his Finance Minister, Gary Collins, might have done it differently.

Their 25-per-cent personal tax cut last June, one day after assuming office, reaped some wonderful headlines. So did their subsequent cuts to business taxes. The cost of those moves -- about $2.2-billion -- came back to haunt them on Tuesday, when Mr. Collins' budget included $800-million in tax increases needed to keep the province from digging its self-created fiscal hole even deeper.

Act in haste, repent at leisure, goes one variant of an old saying, though in this case, this last retreat was a bit hasty as well.

Mr. Collins was ready to deal with the fiscal consequences of legislated wage settlements that will give big increases to nurses, health technicians and teachers. But with budget day approaching, he wasn't expecting an arbitration ruling that will force him to pony up an extra 11 per cent for doctors. Thus the surprise tax increases that unwound one-third of last June's work. "I had 24 hours literally to come up with a plan to deal with this," Mr. Collins said.

None of this would have been necessary if he had borrowed from the book written during the 1990s by other finance ministers who wanted to cut deficits and taxes alike.

In Ottawa, Paul Martin tackled the deficit first, mainly through spending cuts that are still a sore point with the provinces, and followed those with big tax cuts once a surplus looked secure.

Alberta and Quebec too began by reducing spending, leaving tax cuts until a surplus arrived.

In Ontario, Premier Mike Harris and Ernie Eves were just as committed to lower taxes as the Campbell-Collins team, and just as wedded to the (incorrect) view that a smaller tax load would stimulate the economy so much that higher revenues would eliminate the deficit. But even they phased in their tax cuts over several years, so they could avoid the sudden ballooning of the deficit that is now the B.C. budget story.

Similar prudence could be found in almost every province east of the Rockies from the mid-1990s on, and in most cases, deficits have become an artifact of history. In British Columbia, however, the 1990s linger into the 2000s, and the government can only hope that it too will be rewarded with enough revenue from more economic growth to lift its books into the black.

What are the odds?

Mr. Collins has long since abandoned the happy-happy forecasts that characterized his July economic statement. To his credit, he gave up on his prediction of 3.8-per-cent real growth in 2002 only a few weeks later and has now scaled the outlook back to a more realistic 0.6 per cent.

He has also given up on the notion that his tax cuts will lure back many of the 50,000 British Columbians who left for Alberta and Ontario since 1998.

Such leisurely repentance from last summer's predictive haste represents a big improvement in budget credibility. So do the fiscal cushions Mr. Collins has adopted in his revenue and spending forecasts; Mr. Martin invented them and other finance ministers have found them useful as well.

Still, it's wise to be cautious. Ottawa, Queen's Park and Quebec City got lucky after 1995 when a booming U.S. economy came to their rescue. The long surge in their biggest export market generated income growth that swelled government treasuries to the point where fat surpluses became inevitable.

Mr. Collins is unlikely to be so lucky. The U.S. and Canadian economies will recover, but there's little chance that we will see a repeat of the real growth rates of 4 per cent to 5 per cent they enjoyed from 1997 through 2000. And U.S. growth won't spill over much into British Columbia as long as the softwood lumber dispute drags on.

Then there's Japan, which is more important to British Columbia than it is to any other Canadian province. Between 1990 and 2000, the share of B.C. exports of goods going to Japan fell to 14 per cent from 28 per cent, because the Japanese economy has been in one recession or another for more than a decade now. Japan probably needs a real shock -- which would be bad news for British Columbia -- before it will make the changes needed to get its economy back on track.

The province's deficit as a share of gross domestic product now rivals that of Ontario and Alberta in 1993 and 1994. Perhaps Mr. Collins can wipe it out in only three years, as he vows. But don't bet big money on it.
blittle@globeandmail.ca

 

 

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