The provincial NDP government in British Columbia took power in Victoria less than two months ago. Given this short period of time and the need to build a political alliance with the Green Party, it is completely understandable that the NDP was able to insert only some, not all, campaign promises made earlier this year in its budget.
This budget includes tax increases for large corporations, high-income earners and polluters. First, the general corporate income tax (CIT) rate will increase from 11% to 12% in January 2018. Second, the income tax rate for individuals with a taxable income over $150K will increase from 14.7% to 16.8% also as of next January. Third, the carbon tax will increase by $5 per tonne of CO2 each year for four years, starting in April 2018.
With these three tax hikes, the B.C. government hopes to bring in an extra $700 million in fiscal revenue annually. These, combined with an additional $1 billion coming from the better-than-expected performance of the B.C. economy, will be used to finance new initiatives:
- A 50% premium reduction paid by individuals for medical services plan, effective January 2018.
- The restoration of the preferential tax treatment of corporate income for credit unions.
- Close to $200 million per year in funding for K-12 education services.
- Close to $200 million annually to operate 2,000 new housing units for the homeless.
- Financial support for operating 1,700 new affordable rental units.
- Close to $200 million annually in forgone revenue for the elimination of the Port Mann/Golden Ears bridge tolls.
- Close to $100 million annually in forgone revenue for the 1% retroactive reduction in the CIT rate for small businesses, effective April 2017.
Moreover, the costs related to the large wildfires in B.C. are pegged at $668 million for FY 2017-18. Altogether, the upward revision in total spending contained in this budget update is close to the upward revision in total revenues. Thus, the budgetary balance projected is similar to what was presented in the 2017 February budget. A $246-million surplus is now projected in FY 2017-18, slightly smaller than the $295-million surplus projected last February and representing only 0.1% of NGDP.
Besides the maintaining of a balanced budget, market participants will be pleased that the size of the borrowing requirements for FY 2017-18 were revised down: there is only $2.9 billion left to borrow in FY 2017-18. The three principals factors behind this revision are: the cancellation of the George Massey replacement bridge project, the stronger-than-expected fiscal surplus registered the previous year ($2.7B in FY 2016-17) and internal financing/short-term borrowing shaving $0.5 billion to borrowing requirements.
The elimination of tolls on the Port Mann Bridge has led to a technical reclassification. The bridge is now accounted for in the taxpayer-supported debt, the main measure of public debt used by investors to assess the province of B.C. debt capacity. Despite a one-time increase of $3.5 billion in the debt level caused by this reclassification, the taxpayer-supported debt-NGDP ratio is not affected significantly due to stronger-than-expected economic growth. Indeed, this ratio is projected to reach 16.2% at the end of FY 2017-18, which is not materially different from the ratio projected in the 2017 February budget (15.9%). Essential for the preservation of the province’s AAA rating, the ratio is also forecast to remain fairly stable during the next two years (at 16.4% in FY 2018-19 and 16.3% in FY 2019-20).
More to come in the 2018 February budget
In this budget update, the NDP government kept the previous Liberal government’s commitment of maintaining a balanced budget. This being said, Finance Minister Carole James warned investors and the public that that the biggest policy changes will be announced in the 2018 February budget. Most notably, the NDP is planning to gradually put in place a $10-per-day childcare system; this program is eventually going to cost more than $1 billion per year. The cost of this program represents more than 2% to total public spending, a major issue for the province’s fiscal outlook. The challenge will be to find the wiggle room to implement this measure without having to rely on more debt issuance. This is not going to be an easy feat since the pace of economic growth is forecast to ease going forward. Indeed, this September budget pencils B.C. annual GDP growth at 2.1% in 2018 and 2.0% in 2019, down from 2.9% this year and 3.6% in 2016.
Finally, the 2018 February budget is likely to include a set of policies targeting the housing sector, such as a $400 annual subsidy for renters, a measure promised during the spring election campaign. Such a subsidy, combined with the recent surge in interest rates that is increasing annual mortgage payments by more than $2,000 (for a new mortgage in Vancouver, based on the variable rate and a 20% down payment on an average home price), is going to convince more households to stay in the already tight rental market. It remains to be seen by how much rents could go up following the increase in interest rates and the subsidy measure if adopted next February. Also, the previously proposed 2% speculative real estate tax applied to the value of residential properties could also be inserted in the 2018 budget. Finally, as it is having the intended result, the 15% foreign tax was maintained by the NDP government. The budget document specifically mentions that “since the implementation of the 15% additional property transfer tax in August 2016, the average rate of foreign investment in Metro Vancouver residential real estate has decreased compared to the rates observed before the implementation of the tax.”
Bottom Line: The NDP remained modest in its 2017 budget update but there will likely be much more to chew on for bond investors and those involved in the real estate market when the NDP delivers its full 2018 budget next February.
