Fiscal conservatism’s West Coast travails

When judging the progress or lack of same in the effort to practise fiscal conservatism and contain the size of government in B.C., there is no better place to start than with the events that unfolded in a 10-day span this fall.

For those of us who know B.C. politics in all its colour and contrariness, it was one of those occasions when outsiders had to be assured, “No, we are not making this up.”

On October 25 of this year, the Fraser Institute, in a competitive ranking of 10 provincial leaders, named B.C. Premier Gordon Campbell the country’s most fiscally responsible premier.

Campbell was rated first among his peers as a tax cutter who controlled spending, and his overall score was diminished only slightly (89.1 out of a possible 100) by a middle-of-the-pack placing for managing debt and deficits.

Two days later, Campbell one-upped his legacy by going on province-wide television to announce yet another cut in income taxes, the fourth during his decade in office and the second largest in provincial history.

Already number one among the tax cutters and he cuts income taxes again and to the tune of $600-million!

This makes it all the more incredible that a week later Campbell called a snap press conference to announce that he was leaving office, his popularity having been destroyed by public anger over the harmonized sales tax.

From hero to the limited government, fiscal conservatism crowd to bum driven from office in a tax revolt in the space of less than two weeks – how can that be? Are we nuts or what?

Maybe a bit, in answer to the latter question. But how this happened will take some explaining.

First, the big picture as seen by the Fraser Institute. The think-tank compared the records of seven current and three recently-out-of-office premiers, rating them on the progress they made on spending, taxes, debt and deficits, however long they were in office.

Campbell did comparatively well on the spending front, often the toughest measure for politicians, given the many demands placed on government by the public.

“Premier Campbell scored a perfect 100.0 and ranked 1st on the government spending component by managing the growth in government spending in a relatively sustainable manner and showing more restraint than any of the other premiers,” wrote the four authors of the study. “During his tenure, he held average growth in program spending (4.4%) only slightly above the average rate of economic growth (4.1%).”

He finished at the head of the class on taxes as well, that being (in their estimation) “one of Premier Campbell’s most significant fiscal achievements during his time in office.”

The highlights package:

In his first budget (2001), Premier Campbell enacted a 25% across-the-board reduction in personal income-tax rates, followed by additional cuts in 2007 and 2008. His 2001 budget also reduced the general corporate income tax rate from 16.5% to 13.5% in 2002 with subsequent reductions to 10.5% in 2010. Currently, British Columbia has the second lowest corporate income tax rate of all the provinces, behind only Alberta’s 10.0% rate.

In addition, there was a footnote: “The corporate income-tax rate in British Columbia will be reduced further to 10.0% in 2011. Importantly, Campbell eliminated the economically damaging corporate capital tax on both non-financial (2002) and financial institutions (2010).”

And, this just in: The October 27 cut to income taxes will give B.C. the lowest provincial income tax rate in the country for brackets up to $130,000 a year.

However, Campbell was denied the trifecta in the fiscal responsibility ranking because of his performance in managing debt and deficits, instead finishing fifth.

From 2001/02 to 2009/10, British Columbia’s average surplus amounted to 0.13% of GDP, earning him a perfect score of 100.0 and 1st place ranking on the first Debt and Deficits measure. Over the same period, Campbell reduced British Columbia’s net debt from 18.5% of GDP in 2001/02 to 15.7% in 2009/10.

The authors found the performance had faltered in recent years.

Premier Campbell has increased B.C.’s net debt as a share of GDP. For instance, he increased net debt from a low of 11.6% of GDP in 2007/08 to 15.7% of GDP in 2009/10. The increase is the result of annual deficits over recent years and increased capital spending financed by government debt.

The latter trend, though not enough to deny Campbell the gold medal in the Fraser Institute ranking, does provide a link to his political troubles.

He came into office promising to balance the budget and rein in debt. However, he performed better in the middle years of his decade in office than near the end of it.

In 2009, with an election approaching and revenues on the slide, he suspended his balanced budget law and announced that the province would run a bare minimum deficit of $495-million.

Many economists, including members of the government’s economic forecasting council, warned that the figure was too low. Nevertheless, Campbell was determined to portray himself as a leader who could hold the line, insisting, up to the day of the election, that the $495-million was an absolute “maximum” deficit.

He won the election. However, two days after the votes were counted, finance ministry officials delivered the full bad-news picture. Just six weeks into the financial year, revenue projections were already off by$1.5-billion.

“I was very concerned about getting those numbers,” Campbell would say later. “I actually said to them, ‘Why am I getting these numbers now?’” Colin Hansen, the Minister of Finance, was more succinct: “The Premier was pissed off.”

The finance officials got their marching orders to go out and find out how the government was going to meet its budget target of $495-million. Two days later, they were back with a narrow list of options. Cut spending. Ugh. Raise taxes. Double ugh.

Alternatively, the federal government had a standing offer of transition funding for provinces that agreed to harmonize their provincial sales taxes with its national goods and services counterpart. Ontario had already tapped the offer to harmonize its tax. B.C.’s proportional share would deliver a handy $1.6-billion to the cash-strapped provincial treasury.

“That’s what got our attention,” Hansen would say later. “And that’s what started the whole serious look at whether or not we should [harmonize].”

The decision came together quickly. Ottawa insisted on an expedited implementation schedule. B.C. was not prepared to plead for an extension to prepare the public.

So on July 23, 2009, Hansen and Campbell announced “the single most important thing we can do for the B.C. economy” – the PST would be harmonized with the GST at a combined rate of 12 per cent.

This just 10 weeks after a provincial election campaign in which the prospect of harmonization was barely mentioned, never mind highlighted as “the single most important thing” that could be done to help the B.C. economy.

The anger was immediate, vicious, and unstoppable. At best, it was assumed the Premier snuck through the campaign without mentioning his intentions. At worst, (and this was the majority view), he was assumed to have flat-out lied.

Though the opinion polls indicated an immediate shift of public opinion against the government and its tax, Campbell soldiered on, presuming (as would most Canadian politicians) that it was very early in the term and the anger would fade with time.

He neglected to consider that British Columbians had recourse to a mechanism for holding governments to account that is not available elsewhere in the country, namely initiative and recall legislation.

The legislation was a product of an earlier drive to limit the size and ambit of government, adopted in 1994 with Campbell’s support and then forgotten because it was thought to be unworkable in practise.

Wrong again. The legislation, at least the part allowing people to initiate legislative measures by petition, turned out to be entirely workable, as an organization by the name of Fight HST proceeded to demonstrate in the spring of 2010.

Leading the campaign was Bill Vander Zalm, a former premier of the province. Twenty years earlier, Vander Zalm had split the then governing Social Credit party by insisting on governing as both a fiscal and a social conservative. After a series of scandals and controversies, he was eventually forced from office by his own colleagues but not before placing the Social Credit on what proved to be an irreversible road to ruin.

He had long sought vindication, mounting several comeback attempts over the years. And his populist charm – with the social conservatism suitably muted – was just the ticket for leading the grassroots revolt against the Hated Sales Tax as it was invariably known.

With Vander Zalm at the helm, the petition in support of his proposed HST Extinguishment Act gathered more than half a million valid signatures in the space of three months, more than enough to meet the threshold to send it to either the floor of the Legislature or a province-wide referendum.

Caught flat-footed and humiliated, Campbell finally had to bow to grassroots power. The initiative would go to a province-wide vote, he decided, and if people voted to extinguish the HST, it would be gone.

Campbell announced his decision in September as the first in a series of gestures that were intended to show he had gotten the message and thereby win back public favour. There were mea culpas on the handling of the HST, the promise of further spending on capital projects (roads, bridges and transit), a cabinet makeover and an ambitious government reorganization.

The income tax cut in late October was the last in the series. Last ditch, some would say. Going in to the night of the televised address, Campbell was already trailing badly in the opinion polls, with an Angus Reid online survey pegging his personal approval rating at a Nixonesque nine per cent.

Ipsos Reid took the first crack at rating the public response to the televised address and the verdict was devastating. The largest group of respondents said the address had actually worsened their impression of Campbell (43 per cent) and his government (47 per cent).

As for the content, only 27 per cent said they “approved strongly” of the tax cut, while another 33 per cent mustered a grudging “approve somewhat.” About the same share (32 per cent) actually opposed the tax cut.

You cut taxes by almost $2-billion over three years and a third of the people say “no thanks” while the rest are collectively lukewarm? It was over, as Campbell conceded while making his announcement on November 3rd.

When you have a situation where our economy is one of the best in North America, when people in B.C. are paying some of the lowest taxes of any jurisdiction in North America, when our nurses, our teachers, our workers are having more take-home pay in their pocket than they’ve ever had and people are saying, ‘Gordon Campbell, you know, I don't like him,’” … it’s clearly time for a change, and that’s why I called the party president and I said it was time for a leadership convention.

He is going. But not to be too uncharitable about a development that most British Columbians had wanted, he leaves a lot of uncertainty behind him, particularly in terms of his legacy as a national leader on fiscal conservatism and limited government.

First, the HST is on life support. The vote is set for September 2011 and unless people can somehow be persuaded to love what they have hated to date, they are likely to vote to extinguish it and go back to the provincial sales tax.

The province would then be obliged to enter into negotiations with Ottawa on the timing and cost of the changeover, including the need to pay back the $1.6-billion in transition funding.

This at a time when Campbell, with his last tax cut, liquidated virtually all of the $2.1 billion in unallocated revenue that had been identified by the ministry of finance in its fiscal plan for the next three years. Making it even less likely that the budget (currently in deficit) can be brought back into balance any time soon.

He also leaves behind an emerging split in his B.C. Liberal Party. Notwithstanding the name, the party, like Social Credit before it, is a centre-right coalition between liberals and conservatives.

The governing party’s long agonies over the HST, coupled with the other accumulated baggage and controversies of almost 10 years in office, have sparked an organized effort to create alternatives to the increasingly discredited Liberals.

Some of Vander Zalm’s associates have launched BC First, modelled on Alberta’s Wildrose upstart. Other political activists are trying to revive the long-moribund B.C. Conservative Party, as an alternative to the B.C. Liberals.

It is too soon to say if any one of them will take off. However, they do not need to garner more than, say, 10 per cent of the vote to have an impact on the outcome of the next provincial election.

One of the surest rules of B.C. politics is that the centre-right wins when its support is united behind a dominant political vehicle such as the B.C. Liberals or Social Credit. It loses when the support fractures between two or more parties.

In the vote-splitting scenario, the New Democratic Party tends to win as it did (with roughly 40 per cent of the vote) in 1972, 1991 and 1996. Not surprisingly, New Democrats were among the most enthusiastic supporters of Vander Zalm in his drive to humiliate Campbell over the HST.

With the next premier yet to be picked (the vote is set for Feb. 26) and the next election set for May 2013, it is too soon to say how things will play out over the months and years.

As things stand today, the most likely outcome of the successful tax revolt against the HST is the election of the NDP. That party, in its previous turns of office in B.C., did not head anyone's Top 10 lists for cutting taxes, limiting spending or reducing debt and deficits.

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