Crawl Across the Ocean

Sunday, February 25, 2007

A Tax Cut to Meet the Challenge of Buying More Stuff

Due to a busy week, I didn't really have time to comment on the B.C. budget when it happened. If the government is to be believed, the biggest challenge facing B.C. currently is that income tax rates, already pretty much the lowest in the country, were too high. The government tried to pass off the tax cut as part of a 'housing plan' but that spin was likely too laughable even for the government-friendly CanWest chain (I don't know for sure though, I didn't check).

You can see the forecast for more debt here. The B.C. government likes to claim it has a surplus while increasing the debt because it doesn't treat capital spending (building roads, bridges, hospitals, etc.) as an expense in the year in which the costs are incurred. A couple of years ago I explained why, while this method of accounting might make sense for business, I don't think it is logical for government.

On the same page as the debt totals, I was amused by the sequence of 3 tables:
1) The first shows that GDP growth (income growth, basically) in B.C. was 3.9% last year.
2) The second show that property values in B.C. were up 24% in 2006.
3) The third is the statement that 'Among the challenges arising from a growing economy is home affordability.'

Obviously the challenge of affordability has a lot more to do with property values run amok than it does with 3.9% GDP growth!

The next table is where the government demonstrates that either:
a) They have 0 understanding of basic supply and demand or
b) They are deliberately trying to mislead the public

This is where they claim that cutting taxes - for everybody - will make housing more affordable. To the extent that people use money from tax cuts for housing, that will make prices even higher than they otherwise would have been. And given that the more you make the more you benefit from the tax cut, it's likely that those who currently aren't making enough money to afford a house will find housing even more unaffordable as those making more than them who already have a house drive prices up further buying bigger houses with their bigger tax cut.

More to the point, the table titled 'Meeting the housing challenges of a growing economy' just shows how much more money is available for tax cuts than there is for genuine housing initiatives. Not to say that estimates $100 million/ year in increases housing funding isn't welcome, just that it pales compared to the $500 million / year cost of the tax cut.

Near the bottom of the page, there is a chart showing the decline in the debt/GDP ratio from around 20% when the Liberals gained power to about 15% now. While it would have been negligence not to have seen that number decline given the favourable economic conditions B.C. has seen in the last 5 years, it's still nice not to have seen such negligence. I do think that B.C. should be paying the debt down further and faster while commodity prices are high, the boomers are in their peak earning years, the beetle infected lumber is being chopped up and the housing bubble is still inflating.

There is also more money for schools and a reasonable increase for health care funding, for next year anyway, but after the big green throne speech, very little in the way of spending on environmental initiatives. Supposedly we will see funding for Green initiatives next year, I guess we'll see. The Olympic clock isn't the only one ticking.

Summarizing, it's a mediocre budget. Not terrible, but there were a fair number of missed opportunities to make B.C. stronger going forward. And passing off a tax cut as 'a tax reduction to meet the challenge of a growing economy' is the kind of fraudulent spin that makes one question everything else a little closer.

If you're interested in a couple of other interesting takes on the budget, Paul Willcocks has a good article and Mark Lee at Relentlessly Progressive Economics breaks down some of the numbers as well.


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