Friday, February 23, 2007

THE 2007 BRITISH COLUMBIA BUDGET

From TD Economics - Released on February 20, 2007

HIGHLIGHTS

  • Planning surplus estimated at $2.8 billion in FY 06-07
  • Further black ink targeted over the next few years
  • 10% personal income-tax cut the budget’s centrepiece
  • Announced measures to address the affordable housing challenge
British Columbia’s Golden Decade continues at full throttle, .... Today, the government turned the spotlight on the province’s housing challenge, although many of the measures presented today will accomplish multiple aims.

Fiscal 2006-07 another banner year
Owing to a booming economy, total revenues stormed in $2.7 billion higher than planned .... Not all of the windfall flowed through to the bottom line, as the government booked an additional $900 million in spending, some of which was related to new measures announced today, such as the establishment of a $250 million Housing Endowment Fund. Meanwhile, with the risks to 2006-07 forecasts now having diminished, the government has scaled back its forecast revenue allowance by $550 million. If not used, the remaining $250 million cushion would transform the year-end tally to $3.15 billion, surpassing last year’s rosy performance and the highest on record.


Tax cuts to take a bite out of revenue growth
....


The cornerstone of this year’s budget on the tax side was an announced 10% reduction in personal income taxes for individuals earning up to $100,000, effective January 1, 2007. Although this tax cut was “sold” in the budget as a measure that will help defray the costs of home ownership, the implications are much broader. Indeed, at this threshold or lower, B.C. will surpass Alberta as the jurisdictions with the lowest PIT bill among the provinces. The measure is slated to save an individual earning $50,000 per year $315 and $864 for someone earning $100,000.

Other more modest tax reduction initiatives tabled today included an increase in the threshold for the First Time Home Buyers’ Program for property transfer tax exemption, a beefed up Home Owner Grant and sales tax rebate for the purchase of hybrid cars. Together, these measures are projected to shave about $1.5 billion from revenues.

Program spending is expected to increase by a moderate rate of 4% per year during the forecast period, with much of the increase front-end loaded into 2007-08. There were a slew of housing-related measures, including increased funding for shelter beds, a lifting of the shelter rate for individuals on social assistance and housing support for low income seniors. Still, the usual suspects – health care and education – were far from forgotten. In fact, new funding in these areas still accounted for more than half of the total new spending.

...

Tax supported debt
...


Bottom Line
British Columbia’s improving fiscal path, and falling debt burden, continue to increase its flexibility in confronting head on the province’s longer-term challenges – a fact recently supported by Moody’s decision to upgrade the province’s credit rating to AAA. While housing topped the headlines today, the environment is poised to become a dominant theme in future budgets. The good news is that taking measures to improve the environment – and at the same time dealing with the province’s Achilles Heel, weak productivity – are not mutually exclusive goals. The benefit to both areas of shifting the overall government revenue mix from income taxes to consumption taxes/user fees is case in point.


I don't comment much on politics because it tends to get emotional but I couldn't resist commenting on the BC Budget for 2007 because of the spin it has been given - making housing more affordable for BC residents.

Clearly, by allowing BC residents to keep more of their own money by reducing income taxes and the property transfer tax, it will free up more money to spend or save. They may decide to spend it on housing but they may not. Economically speaking, giving potential buyers or renters more money actually gives incentive for prices to rise, assuming demand will rise with the 'newfound wealth' we will all experience (a few hundred dollars a year is hardly worth writing about but every little bit counts)!

That said, if prices rise, supply should increase as well, providing some downward pressure on prices but I think we've already seen the supply situation explode so I'm not sure the budget will have any significant effect on the housing situation relative to these effects given the relatively minor nature of the tax cut. Assuming the the BC government knows that the BC housing situation is precarious on the pricing front, I am wondering at this point whether the government is going to try to 'take credit' for improving affordability in the future by positioning the budget this way.

8 comments:

patriotz said...

You pretty well said it all. The BC government is not trying to make housing "affordable" at all - it's just trying to juice up the market and keep prices high as long as possible.

No question they know about the debacle unfolding down south, and anyone with any background in RE (hello Gordo) knows that a similar outcome awaits us here. But let's keep that optimism flowing for a another year if we can.

OnTheIsle said...

Exactly, they have no interest in seeing a 20% correction,it will kill all the momentum leading up to Olympics that they are doing everything to not derail.
The deals they are making today on new buildings just starting would be thrown into public question if such a correction was to occur,20% on those mega million deals would not look good,keep the machine moving,this aint California or Florida,it's paradise right ? ;)

It's funny too how that even the so called intelligent government types like Carol Taylor can't even discuss the RE bubble or that a market could dare turn downward. Just throw a $5000 cookie at the young bucks to suck them in at the top.

mohican said...

Phsychology is certainly a powerful force and the large majority of people have been brainwashed to think that the olympics are some sort of insurance against real estate price declines. I do have a feeling that despite powerful market forces, such as dwindling demand and burgeoning supply, we will not see significant 'crash type' price declines until after the olympics. I say this for a variety of reasons:
1) Aforementioned buyer/seller phsychological reasons
2) Employment / Unemployment on olympic related venues and infrastructure.
3) The natural timing for large price declines seems to fit in the 2009 - 2011 time frame anyway.

domus said...

I think the effect of tax cuts will be marginal. Few thousand dollars discounts on the very top pax payers (we are talking people making at least 80K) will not be much of a liquidity injection. In the past few years prices have risen by an average of 30k per year on 2bed average properties.

What I really find surprising is the complete neglect of the housing situation for middle-classes: suppose you are married and have 2 kids in their early 20s. On the one hand you might have made a bucket of dollars on your SFH. On the other hand, if you care about your kids, you better get worried: housing costs are going to be steep for them.

I just don't see all this positiveness in ever rising prices.

One question: do you know what are the 'new' labor income tax brackets in BC after the cuts?

expo 86 said...

This is OT, but I'm curious about Capital Direct. I hear their ads on the radio all the time. I go on the website and see these glowing testimonials from people who have been done wrong by the banks and just love dealing with Capital Direct. And I see that they have loaned out 290 billion in Canada, which seems like an awful lot, correct me if I'm wrong. Are they connected to the sub prime lenders that are going belly up by the minute in US?

Ulsterman said...

Yes, i knoe i posted this already at (un)real estate's blog but given the scarcity of comments today ever little helps. The blogs are all on life support as far as i can see.

Just read the Tyee report on the demise of the VHB and, though i was loathed to bring up vhb's departure yet again, i felt obliged to highlight this apparent contradiction:

At one point after his departure, he responds to Freako's comment with:

"Freako suspected it was most likely that his cover was blown. But the VHB responded, "none of the above. Just personal/professional life will be too busy to continue."

However..., he then says to the Tyee interviewer:

"Also, people vastly overestimate how much time things took. It really wasn't hard to cut and paste a newspaper article or to add one or two more data points to an existing spreadsheet and then post the graph."

Sorry, but this isn't some looney-left conspiracy theory about vhb being abducted by the Masonic, Area 51, Illuminati Cameron Muirists Disciples, no, it's a flat-out contradiction that demonstrates that his announced reason for leaving so suddenly is completely bogus.

On another note, it appears that the local bloggers appear to have lost their appetite to continue the conversation. I suppose apathy has prevailed.

mohican said...

"On another note, it appears that the local bloggers appear to have lost their appetite to continue the conversation. I suppose apathy has prevailed."

I have not lost my appetite for this conversation and I don't plan on stopping anytime soon. I know Van UnReal had a baby this last week so I'm not sure what you can expect there. I will also be in that position in a couple months. Sometimes a break is needed.

patriotz said...

Mohican, your points 1 and 2 applied equally well to to the early 1980's (Expo, Skytrain, etc) and look what happened. And population growth was much greater then.

As to #3, this bull market is already 5 years old, the early 1990's runup was of similar duration and again population growth was higher. So I just don't think it has many legs left.

Really events will be driven by what happens south of the border. The housing crash in the US is already a given. If the US faces an official recession in 2007 or 2008 nothing is going to keep this show going.