On Tuesday, February 16, 2016, the Government of British Columbia tabled in the legislature their annual budget—Budget 2016.
Budget 2016 contains overall good news for British Columbians. Relatively speaking, BC is a low debt and tax jurisdiction, where the government has great fiscal flexibility due to sound management and a low debt-to-GDP ratio. Add to this the still unrealized natural resources potential beyond the current commodity price downturn, and the also still unrealized full potential of the Asia Pacific market for BC, and the long-term prospects of stable growth for the BC economy are strong.
The province is in a lonely club of one in being able to boast about its balanced budget. Québec is expected to table a balanced budget in the coming weeks, but Québec’s debt, taxation and infrastructure liabilities put the province in a much more challenged economic position than BC.
However, BC doesn’t merely have a balanced budget; the province actually has quite a sizeable budget surpluses forecast: CA$264 million in 2016/17, CA$287 million in 2017/18 and CA$373 million in 2018/19. These cumulative surpluses will provide the BC government with fiscal capacity to react to needs through the year, provide strategic investment opportunities, stimulus spending choices, or focused tax relief.
In the government’s communications documents there is an emphasis on the budget balance, but noticeably less on the size of the surplus. One thing to keep an eye on would be some form of focused, retroactive tax relief in Budget 2017 that uses up this surplus with immediate deliverables to voters just ahead of the May 2017 provincial election. The fiscal capacity is there now, will likely be maintained, and governments seeking re-election typically do not leave unspent fiscal room on the table in the lead-up to a competitive election.
Below are some other observations on the contents of BC’s Budget 2016:
BC in context
Heading into the budget, the economic slowdown that has challenged most provincial governments has had a much more modest impact in BC. This reality has allowed the province to maintain their AAA credit rating, and to be the only province in Canada to actually manage a budgetary surplus, which the province has managed for four consecutive years.
In fact, in Standard & Poor’s rationale for their AAA rating, they pointed to “the province’s very strong and wealthy economy, very predictable and well-balanced institutional framework, very strong budgetary flexibility and low contingent liabilities.” Going further, they “expect the province’s GDP per capita to remain relatively positive in the next two years, with its growing trade orientation toward Asia not only offering diversification against potential future economic weakness in North America, but also improving the province’s growth prospects.”
The total provincial debt, which includes both taxpayer-supported and self-supported debt of Crown corporations such as BC Hydro, is forecast to be CA$67.7 billion in 2016/17, and rising to CA$71.9 billion in 2018/19. Putting those numbers into context, the province is in a strong position among Canada’s provinces when one compares BC’s debt-to-GDP ratio (16.3 percent) to that of other provinces.
Provincial government debt-to-GDP ratios:
49.7 percent - Québec 40.2 percent - Ontario 39.2 percent - New Brunswick 37.9 percent - Nova Scotia 35.9 percent - Newfoundland & Labrador 35.2 percent - Prince Edward Island 31.6 percent - Manitoba 16.3 percent - British Columbia 08.6 percent - Saskatchewan -1.0 percent - Alberta
In BC’s Budget 2016, the Ministry of Finance forecasts BC’s economy to grow by 2.4 percent in 2016, 2.3 percent in 2017, and 2.3 percent per year through 2020. These growth projections are more cautious than those of RBC Economics who are forecasting BC’s growth to be between 2.9 percent and 3.1 percent over the same period. Equally, BMO Capital Markets Economics forecast a slightly rosier 2.6 percent rate of growth in 2016.
It is also worth noting that the Ministry of Finance is forecasting household incomes to grow by 3.6 percent in 2016 and 3.9 percent per year from 2017 through 2020. Following national trends, they also expect retail sales to slow quite sharply, from a 6.5 percent growth in 2015, sliding down to 3.6 percent growth in 2020.
On the revenue side, the rate of revenue growth is expected to slow from an annual average growth of 3 percent in the period of 2009/10 - 2014/15, to an annual growth rate of 2.1 percent in the 2014/15 - 2018/19 period. Total revenue to the BC government has risen from CA$38 billion in 2009/10 to CA$46.1 billion in 2014/15, climbing to CA$50.1 billion in 2018/19.
Worth noting on the revenue front is the forecast decline by 7.2 percent in natural resource revenue in 2016/17 compared to 2015/16, due to the sale of Crown land leases, the impacts of lower commodity prices, and the effect of the expiration of the Canada-US Softwood Lumber Agreement. Mining and mineral revenue, in particular, are forecast to take a steep turn downward, with revenue from mineral tax, fees and other receipts expected to decrease 26.1 percent in 2016/17. Over the next two years, the average annual change in natural resources revenues is expected to decline a further 4.8 percent. Also, natural gas royalties are expected to decline 15.2 percent in 2016/17 mainly due to the impact of the lower forecast prices.
The BC government is less dependent than ever on cyclical resource revenue streams; however they are now more dependent than ever on cyclical housing markets and associated revenues. Another sign of the shifting revenue picture for the province, for the first time in BC history, revenue from Medical Services Plan (MSP) premiums will eclipse the revenues of BC’s resource revenue (natural gas royalties, Crown land tenures, forests, etc). MSP premiums will bring CA$2.549 billion in revenue to the BC treasury in 2016/17, rising to CA$2.78 billion in 2018/19. Meanwhile, natural resources revenue will decline from CA$2.347 billion in 2016/17 to CA$2.125 billion in 2018/19.
On a positive longer-term revenue potential note are federal government transfers that are forecast to average 3.2 percent annual growth over the next three years due to the expected increases in the Canada Health Transfer (CHT) and the Canada Social Transfer (CST). And these increases do not take into account any new revenue to the province that might result from a new Health Accord between the Government of Canada and the provinces, something Prime Minister Trudeau pledged to undertake in the 2015 election campaign, and reinforced as a commitment to Canadians in his mandate letter to his Minister of Health. With aging populations, budgetary demands, and various provincial elections between now and the end of 2018, there will be high expectations of Canada’s provinces to see this health commitment delivered by the federal government.
Real estate and housing
Newly-built homes priced up to CA$750,000 will be fully exempt from the property transfer tax when bought by Canadian citizens or permanent residents as a principal residence and lived-in for a full year. The measure aims to assist purchasers and help stimulate the construction of moderately priced homes. The exemption will save a purchaser up to CA$13,000, and provide an estimated CA$75 million in property transfer tax relief for new construction in 2016/17. Partial exemptions are available for new housing valued up to CA$800,000. Newly-constructed housing eligible for the exemption includes the first purchase of a new housing unit or a newly-subdivided unit.
Those who buy land and build homes to be used as their principal residence can also apply to receive a refund of property transfer tax rather than an exemption at the time of registration, if they complete construction and move in within a year of purchase. The program will be available to buyers regardless of how long they have lived in BC, meaning those who move to BC to take jobs, start companies and build their lives here will also benefit. The exemption will be available to first-time buyers and previous property owners alike.
The government asserts that the new housing exemption will be largely funded by increasing the property transfer tax rate to 3 percent on the portion of fair market value over CA$2 million. The 1 percent rate on the first CA$200,000 of property value and the 2 percent rate on the value of a property between CA$200,000 and CA$2 million continue to apply. The new higher rate is expected to raise an additional CA$75 million each year—the approximate cost of the new housing exemption.
The government is also proposing changes to the Property Transfer Tax that will authorize the government to collect new information from owners when they register their property. Specifically, purchasers will be required to identify themselves as Canadian citizens or permanent residents. Individual transferees who are not Canadian citizens or permanent residents will be required to disclose their citizenship. Corporations will be required to disclose their directors’ citizenship. Transferees will also be required to disclose whether or not they are holding the land as bare trustees when they register and provide information respecting the settlor and beneficiaries of any bare trust.
Citizenship disclosure was required with land transfers until 1998. These changes will generate data that will allow the government to monitor the volume of foreign investment and use of bare trusts and assess what effect, if any, they have on pricing. The new disclosure requirements will come into effect in the spring of 2016 according to the Finance Ministry.
Also worth noting is that the threshold for the phase-out of the home owner grant is increasing to CA$1.2 million from CA$1.1 million for the 2016 tax year. For properties valued above the threshold, the grant is reduced by CA$5 for every CA$1,000 of assessed value in excess of the threshold.
The Government is also putting a strong emphasis on social housing with new taxpayer-supported capital spending of CA$355 million over the next five years. A new Provincial Investment in Affordable Housing program will “increase the supply of house across the province by more than 2,000 units” for British Columbians with low or moderate incomes.
BC Prosperity Fund
Originally proposed as a landing spot for Liquified Natural Gas (LNG) revenues, Budget 2016 also created the “BC Prosperity Fund”, with an investment of CA$100 million. This is the province’s attempt at establishing a wealth fund based broadly on what commodity-based economies elsewhere have done. Chile, Norway, Australia, Alaska and Alberta all sighted by the BC Government as examples that will guide this new fund. With the first CA$100 million investment, the government will allocate a minimum of 50 percent of cash flowing into the fund to debt retirement, and a minimum of 25 percent will be saved to accumulate earnings. The balance will be made available for “core government priorities” over time. The Budget notes that “while this inaugural CA$100 million investment is modest, government may increase this amount when the final 2015/16 surplus is known. In addition, future government surpluses, which will include LNG revenues, will help grow the fund over time.”
Medical Services Plan rate structure shift
Medical Services Plan (MSP) premiums are a major source of revenue for the provincial government, and a burden for BC taxpayers. Budget 2016 makes broad changes to the MSP rate structure that will result in savings for many British Columbians, mainly by changing the calculation of MSP premiums so that the calculation will no longer include children. The monthly rate for each household will instead be based only on the number of adults, and the MSP premium rates will increase by CA$3 per month for an adult to CA$78. The special discounted MSP rate for couples will be eliminated, adding CA$14 a month to a family of two adults. Further, the province will enhance premium assistance for modest income individuals, families and seniors. All changes will take effect on January 1, 2017.
The government has made available online the “MSP Premium Assistance Eligibility Calculator” so that British Columbians can discover how the policy shift will impact their finances.
The calculator is available on the British Columbia Government website.
Low copper and coal prices have put many mining operations in the province at risk. The province knows this acutely, and is looking at policy instruments to help these firms. Just prior to this week’s budget, the BC Government announced that the mining exploration tax credit would be extended for an additional three years to the end of 2019. The credit is accessible by both corporations and individuals that undertake mining exploration in the province. The credit is calculated as 20 percent of eligible BC mining exploration expenditures, or 30 percent if exploration is in the mountain-pine-beetle-affected area.
The government also announced that companies operating metal and coal mines in BC will be able to defer a portion of their BC Hydroelectricity payments. The amount a mine will be allowed to defer is capped at the equivalent of up to 75 percent of its electricity costs over two years of the program, and as commodity prices recover, the mines will repay the amounts deferred, plus interest.
Commission on Tax Competitiveness
Inefficiencies and archaic features in BC’s new (and former) sales tax regime have long frustrated many in the business and investment communities. In Budget 2016, the government has announced that it is establishing a Commission on Tax Competitiveness that will “identify the ways in which the Province’s economy is changing and evaluate the current tax structure within the context of those changes.” In his budget speech, BC’s Finance Minister was quick to say that a Harmonized Sales Tax would not be entertained by the provincial government - recognizing the political dynamics associated with the recent plebiscite on the policy. The Commission will be struck after the adoption of Budget 2016, they will consult broadly, and will make recommendations to the government in the fall of 2016.
Government documents estimate that the film and television industries in BC employ about 20,000 people, one of the largest skilled labour forces in the sector in Canada. With eight major studios, more than a million square feet of studio space, and an endless diversity of film locations in the province, the industry is not only a source of pride, but one receiving strategic investments due to its economic potential.
Tax treatment of production costs vary in jurisdictions around North America, and the BC Government is clearly signalling a desire to be one of the most attractive destinations for investment. While no new policy was announced on this front, the budget documents note that the government “will work collaboratively to develop solutions that can be implemented this year,” and further notes “the Government will limit the growth of the film tax credits across 2016/17 through 2018/19, but the cost of the credits will still be the highest amount ever budgeted.”
With jurisdictions like New Mexico, California and North Carolina all shifting their tax rules to gain a competitive edge, this is an area of public policy that will be of keen importance to British Columbians through 2016.
Prior to the budget, Premier Clark made a high-profile announcement of a CA$15 million grant to support the creation of the BC Music Fund to bolster the province’s music industry. The Fund will be administered through Creative BC and will support activity in the music sector in order to “diversify BC’s economy, stimulate foreign direct investment, enhance music tourism, stimulate the creation and retention of jobs, and encourage increased activity in regional centers.”
The three major music labels—Sony, Universal and Warner—all have presence in BC, and there are 58 independent record labels, 123 sound recording studios and hundreds of music publishers, managers and other businesses associated with the industry.
Health funding in BC is growing, both on the services and capital sides. The Ministry of Health’s annual budget will increase by CA$523 million in 2016/17, and the ministry’s budget will reach over CA$19 billion by 2018/19. The average rate of growth will hold steady at roughly 3 percent, federal government transfers are currently increasing at a rate of 3.2 percent per annum, and the expectation among provinces is for the federal investment to rise under Prime Minister Trudeau given his commitment to a new long-term Health Accord with Canada’s provinces.
With respect to capital spending on health infrastructure, the BC Government is investing CA$2.9 billion in the next three years. Highlighted investments in Budget 2016 include the following:
- Facilities at Vancouver General Hospital
- Construction of two new hospitals on the North Island (one in Courtenay/Comox; one in Campbell River)
- A new patient tower in the Penticton Regional Hospital
- Redevelopment of the Children’s and Women’s Hospital, with the new Teck Acute Care Centre adding more than 200 new beds, modernizing 179 others, and expanding the paediatric operating rooms, diagnostic centre and the emergency department
In October of this year, the Canada-US 2006 Softwood Lumber Agreement will end. As part of the agreement, the US committed not to launch countervailing duty or anti-dumping (CVD/AD) litigation against Canadian lumber products before October 2016. It is a widely-held view that the agreement will be neither extended, nor renewed, in spite of this being a key demand of the BC Government, of industry, and a position held by the federal government. It is, therefore, interesting to note that the economic and fiscal projections of the budget neither assume a continuation of the agreement, nor plan for potential litigation that could arise after the October 12, 2016 termination of the agreement. The budget notes that “the BC Government is … preparing its defence for any new litigation, and continuing to develop other markets for BC forest products.” Assuming the agreement dies in October, significant government resources would be needed to expand market access beyond the US market, and resources would have to be identified for litigation associated with firms that still see the US as their principal market opportunity.
The next election in BC will be on May 9, 2017, assuming there is not an earlier election call.