The Campbell government is often accused of being insensitive; now there is evidence that it has made government revenues less sensitive to economic change.

When the budget is tabled, the Budget Transparency and Accountability Act requires the Minister of Finance to present information that will help expose any unrealistic assumptions. In particular, the Act requires "the economic and fiscal forecasts" and "a statement of all material assumptions and policy decisions underlying the economic and fiscal forecasts".

The statement of material assumptions for government revenue includes a column that indicates "sensitivities" showing how much revenue changes if an underlying assumption changes. Table 1.13 on page 30 of the 2003-04 budget documents said that there is a revenue effect of between $200 million and $300 million (before adjustments due to equalization) for every 1% change in nominal GDP. Table 1.2 on page 44 of the 2004-05 budget documents said that there is a revenue effect of between $150 million and $250 million (before adjustments due to equalization) for every 1% change in nominal GDP.

Why has government revenue become less sensitive to changes in the GDP? One possibility is that the Campbell government shifted the tax burden to more regressive taxation. For example, the same MSP premiums have to be paid whether you make $40,000 per year or $100,000 per year, but income tax is sensitive to changes in income. Personal income taxes accounted for 16.45% of total estimated provincial revenue for 2004-05 compared to 16.60% in 2003-04 and 19.89% in 2000-01. MSP premiums accounted for 4.59% of total estimated provincial revenue for 2004-05 compared to 4.70% in 2003-04 and 2.98% in 2000-01. Comparing this year and last, it is true that personal income tax is slightly less important but so is MSP revenue. Comparing this year with the last year of the NDP, personal income tax as a percentage of total revenue is down 3.29 points and MSP is up 2.61 points. That is a shift to regressive taxation over the first three years of the Campbell government, but it doesn't explain the change in revenue sensitivity from last year to this year.

I submitted a freedom of information request for any documents in the Ministry of Finance that commented on the $50 million reduction in sensitivity to changes in GDP, and the Ministry produced two documents. Only one existed at the time the budget was presented, a hand written note that makes working on the back of a napkin much more than a tired cliché, but then Gary Collins once claimed that tax cuts would pay for themselves and he doesn't have so much as a dirty napkin to prove that. (Click here for a pdf file containing the scanned image of the handwritten note.)

The Freedom of Information and Protection of Privacy Act requires that documents be produced, if possible, in answer to requests for information. The Ministry produced a three page memo to retrospectively justify the change in sensitivity to GDP. The first two sentences of that memo confirm my suspicion that BC's more regressive tax system has made it less sensitive to changes in the economy. The memo states "In general, government own-source revenues will grow in line with provincial economic growth. However, taxation revenue sources are likely to be more sensitive to changes in BC nominal GDP than other sources such as fees."

Under the Campbell government the tax burden has shifted to low and middle income families in order to pay for the high income and corporate tax cuts. A consequence is that when the economy turns down, government revenues don't decline as much as they once did.