Budget 2002 - paying for tax cuts

February 20, 2002

Structural Deficits

One of the most frequent cries from the Campbell gang, other than "the devil made me do it", is "the structural deficit made me do it". We know they think of the former government as the devil but their definition of a structural deficit is more elusive.

The Finance Minister started to define structural deficit in his February 19th Budget Speech but he never came to grips with discussing "structure". The Minister said:

"But one-time revenue spikes, from record-high gas and electricity prices, papered over the truth about the province's structural deficit.

And I want to take a moment to clarify the difference between an operating deficit and a structural deficit.

An operating deficit happens when your spending is higher than your revenues for a short period of time.

But a structural deficit is something different - something far worse.

It results from a long-term pattern of consistently spending more than the government can afford - year after year after year - and it can't be solved with one-time, short-term revenue spikes.

In other words, even though last year's budget was balanced, and didn't show an operating deficit, the province was headed for serious financial trouble if that surge in revenues from energy disappeared."

An operating deficit, usually called a cyclical deficit, occurs during bad economic times but disappears when the economy picks up. A structural deficit is a deficit that exists even in good economic times as long as the system of taxation and spending remains unchanged. Any particular mix of tax rules and spending patterns make up the "structure".

Readers will immediately recall that the Campbell government dramatically changed government's structure on its first full day in office. Acting on its claim that tax cuts pay for themselves, Premier Campbell announced $1.5 billion in income tax cuts. That was followed in July with the announcement of $800 million in corporate tax cuts. Those were fundamental structural changes.

On January 17th, Black Thursday, government introduced another major structural change by announcing the elimination of one third of the public service.

The February 19th budget further changed the structural of public finances in BC by increasing several regressive taxes from MSP premiums to the sales tax. Government estimates it will receive almost $800 million per year in additional revenues due to its tax increases.

The 2002 Budget Speech opened with a claim that the budget will be balanced in 2004-05. Anyone examining the budget documents may be less than convinced. It appears that the government is gambling on balancing its budget by achieving surprising high economic and revenue growth based largely on US economic recovery and higher energy prices. After fundamentally changing the structure of BC's public finances by redistributing income from low and middle income earners to high income earners, the Campbell government's elimination of any structural deficit depends on good luck with markets and prices beyond the control of any government. One may ask why were the dramatic structural changes really made? Was the real objective the redistribution of power and income?

February 19, 2002

Budget 2002 - FOI Exposes Core Review

On Budget Day a response to a Freedom of Information Request has shown that core review lacks any objective basis. More on that is discussed below after reviewing the failure of tax cuts.

What if Gordon Campbell had gone into the last election saying if you elect us we will cut income taxes for top income earners and pay for the cuts with 50% increases in MSP premiums and a higher sales tax? That is what has happened, but during the election campaign Gordon Campbell said tax cuts would pay for themselves. The budget documents put the lie to that foolish claim:

"Revenues are expected to decline by $815 million in 2002/03 reflecting:

the impact of tax cuts announced on June 6 and July 30, 2001, which further reduce revenues by $755 million;

further tax competitiveness measures worth roughly $25 million;

a decline in corporate income tax revenues reflecting the effect of weak corporate profits in 2001;

various one-time income tax revenue increases occurring in 2001/02 that will not occur in 2002/03; and

new revenue measures totaling $758 million to pay for health care system compensation costs. After factoring in tax competitiveness and other measures, total revenue measures in 2002/03 are reduced to $736 million.

After declining by 3.6 per cent in 2002/03, revenues are expected to increase at an average rate of 5.1 per cent from 2002/03 to 2004/05. This reflects the global economic recovery and firming commodity prices."

The government is gambling on future economic growth and regressive taxes to pay for their reckless tax cuts. Total government revenue (consolidated revenue fund) was $24.1 billion in 2000-01. The optimistic revenue growth referenced above is projected to yield $24.3 billion in 2004-05.

Restoring government revenue three years after the cuts is not done in Campbell's budget through growth in the areas cut. It is done by increasing MSP premiums, increasing the sales tax and increasing gambling revenue. The government that promised to freeze gambling is forecasting an increase in Lottery Corporation revenue from $268 million in 2000-01 to $596 million in 2004-05.

Total personal income tax revenue was $6.0 billion in 2000-01. It was cut, primarily to the benefit of high income earners, by $1.5 billion on the first full day of the Campbell government. It is projected to reach $5.5 billion by 2004-05. That means that three years after the dramatic tax cut, revenue is expected to be a half billion dollars short of having tax cuts pay for themselves With that admission the Campbell government has admitted to failure. The Premier has paid for the tax breaks for the best off with increases in the most regressive forms of taxation, hurting the worst off.

Not content to just shift the tax burden from top income earners to middle and low income earners, the Campbell government also repeated its new mantra of downsizing government. Service plans that are even more draconian than those initially tabled on Black Thursday were tabled with the budget. One sample from those plans shows the priorities of the Campbell government: Adult Community Living Services (services for developmentally disabled adults) will decrease from $555 million in 2001-02 to $458 million in 2004-05. Some of BC's most vulnerable people are going to be hurt.

When reading his budget, Finance Minister Collins attempted to justify his budget cuts by saying:

"We haven't cut across the board. Instead, we did a Core Services Review.

For seven months, we closely examined what government does - why we do it, how we do it, and whether we need to do it at all - and each ministry looked for innovative, creative ways to deliver public services more effectively and efficiently.

The process was careful, and closely considered - and not just by Treasury Board.

For the first time in the history of B.C. budgets, it brought to the table MLAs representing every community - big and small, rural and urban - all across this province.

The final result is a set of comprehensive service plans, which I am tabling in full today."

As government announces cuts to services, it frequently says "the core review showed it wasn't necessary." Try telling that to a developmentally disabled adult or to an abused child. Government pretends that the core review process was a rigorous examination of government with the use of objective criteria rather than just the arbitrary expression of values by Premier Campbell and his caucus.

I submitted freedom of information requests to every ministry in government asking for the analysis that government indicated it had done. I particularly asked for the studies and estimates showing the impacts of the cuts. On Budget Day I received the first of the replies from the Ministry of Education. The response said:

"Information and Privacy Branch is unable to provide access to the records you have requested because the records do not exist. The August 2, 2001 Guidelines for the Core Services Review were published at the start of the core services review process. The guidelines were produced to give ministry executives a foundation on which to base their analysis and to give them a sense of the issues and questions that would be raised as they considered the future direction of their ministry. Significant latitude was offered, because Ministry representatives were considered the best judge of what information would be of interest to the Core Services Review and Deregulation Task Force. Each ministry approached its analysis differently. For this reason, there are no records dealing with the specific questions that you have raised."

The government posted tough criteria for the Core Review to the Premier's website. Now the reponse to my FOI says that didn't matter. Compare the government's propaganda regarding Core Review with this reality (pdf). The relevant portions of those "guidelines" can be seen by clicking here.

The Ministry of Education is cutting its staff by 10.5% and forcing larger class sizes on schools throughout BC. All of that is done without being able to produce an impact statement! It looks like claims about a "careful and closely considered" process are just more lies.

Minister Collins got one thing right when he reported that all of the Campbell MLAs participated in this sham. Now all Campbell MLAs have to be made accountable for the consequences.