The Real Story on... the NDP's Fiscal Plan

April 9, 2009

The Carole James NDP released a platform and fiscal plan today that promises significant and open-ended spending commitments, new taxes on job-creation, and potential cuts to significant capital projects. The result of this plan is a massive deficit spending plan with no real idea of the true costs of implementation and many unanswered questions.

SUMMARY OF NDP FISCAL PLAN
Carole James’ high-deficit, high-spending platform includes a breakdown of her total spending plan. The highlights include:

$3.683 billion in additional spending and reduced revenues over three years. According to their plan, roughly half of that is due to elimination of the tax on carbon emissions, the other half in new government spending.

This spending is in addition to the government’s current fiscal plan that predicts annual spending growth of 2.2 per cent a year (on average) and anticipates finding $1.9 billion in administrative government savings. It anticipates deficits of $495 million in 2009/10, $245 million in 2010/11, and a balanced budget by law in 2011/12.

OUTCOME: Adding the promised new spending to the existing deficit equals $4.423 billion over three years in potential new deficit spending if it is not mitigated by new revenues.
To make up for this spending, they are proposing new revenues or recoveries on three tracks:

$1.077 billion in new taxes on business and industry over three years including a flaring royalty ($412 million), new surcharges on alcohol ($155 million), higher water rental rates for water license holders ($75 million), re-instating the corporate capital tax ($185 million), and a “GHG Emission pricing” program ($250 million) that appears to be a tax on industrial emitters – although it is not explained in the platform.
$1.3 billion in cuts to government spending over three years through salary rollbacks, restrictions on government hiring and contractors, travel, grants to organizations, and spending the Housing Endowment Fund that is used for affordable housing. (Note: This is in addition to the $1.9 billion over three years the government is already planning to reduce in government spending through reducing advertising, contractors, travel and grants).
$600 million over three years in new revenue which they attribute to the impact of “NDP Stimulus” based on third-party economic models.

In addition, they are proposing a two-year capital spending plan totalling $1.858 billion, which is in part offset by $300 million in “reallocations” of existing capital priorities. Approximately half of those investments would be funded through their “Green Bond” program.

THE RESULT (THEY SAY):
A three-year accumulated deficit of $1.546 billion and capital spending of $1.558 billion over the next two years. No analysis is provided on when that spending would emerge from deficit in future years beyond a written commitment to “balance the budget by year 4”of their plan – or 2012/13.

ANALYSIS OF THEIR PLAN
Carole James’ fiscal plan begins with a key flaw in accuracy that puts the entire plan in question. But beyond that point, it also makes a number of assumptions and estimations that simply do not withstand scrutiny. Consider the following:

ON ACCURACY: Budget 2009 (Page. 73) clearly states that the revenue neutral carbon tax will collect $2.268 billion in revenue over the next three years. This is accounted for in the government’s current fiscal plan, which the NDP platform is built upon. But the NDP plan only accounts for $1.8 billion of that cost. Therefore, even if every revenue projection and assumption materializes as they assume (see below), their plan has an immediate $468 million shortfall over the next three years.

ON ASSUMED REVENUE: Ignoring the $500 million revenue gap as identified, it is clear that the estimates of expected revenues are built on a number of assumptions that either will not be practical, or will have dramatic unintended consequences on revenue.

They lay out three measures to bolster revenue to address their spending program:

New taxes on industry of $1 billion will have devastating impacts on those core sectors, many of which support existing government revenue streams. For example, oil and gas contributes over $2 billion a year in total revenue to government -- $400 million in taxes on that industry would cause investment to diminish and revenues along with it. Similarly, a $250 million tax on industries (who they only identify as the “big polluters”) could have similar impacts on pulp mills, lumber mills, mines and farms who all directly contribute to revenues.
Cuts of $1.3 billion in government spending, while they cite executive salaries and communications staff as sources of recoveries, will have to come largely from contracts with workers and grants to community organizations. At most they will only achieve several million in savings from salary rollbacks or communications cuts. For example, using 2009 budget estimates, even if the NDP eliminated every dollar of government travel, the entire Public Affairs Bureau, and all executive salary increases it would only meet about one-third of their revenue target this year (approximately $90 million of $250 million). That means the remaining $160 million would come out of community grants and contracts with workers, and assuming budgets stay static by 2011/12 that liability would grow to over $400 million. This is all money taken OUT of the economy. Simply put, a cut this sweeping simply would have significant impacts and it is dubious that the NDP could achieve these outcomes, given the reductions already made.
Estimated gains of $600 million through their “stimulus” simply lack rigour. They have already reduced the impact of their stimulus package by levying $1 billion in taxes in job-creators and by cutting $1.3 billion in government spending stimulus. Every one of those dollars taxed back or cut out of the economy works against their stimulus revenues. It is flat out wrong to “count” the positive impacts of their spending without deducting the negative impacts of their new taxes and cuts.

ON CAPITAL SPENDING: At least half of their capital plan is based on their “Green Bonds” strategy , which they have stated previously is a commitment to raise $10 billion over ten years by creating bonds that citizens could purchase. They claim they would reinvest them at a high return and use them to fund capital as well as programs like retrofits, low-cost loans, etc. However, this approach is flawed on a number of fronts:

The B.C. Bond program existed prior to 2001. It raised roughly half the NDP’s Green Bond Plan ambitions ($5 billion) but cost $143 million to administer and promote (in 2001 dollars). Assuming they adopt this model, their plan does not lay out the cost of administering the new program which would be at least $300 million if you apply the B.C. Bonds experience.
The notion of returning a high rate to the person holding the bond, while re-lending the funds at a lower rate, creates a clear “gap” between the two concepts. There is no costing of how that gap would be filled.
The entire funding scheme is premised on people willing to invest in a BC NDP government to manage their money instead of reputable lenders and brokers.

Furthermore, they reiterate in the platform they do not support public-private partnerships in construction – that means any planned P3s and the savings with them are off the table. In healthcare alone, this means projects like the new critical care tower at Surrey Memorial Hospital, the new patient tower Vernon Jubilee, the new outpatient hospital and ER expansion at Kelowna General Hospital, the new hospital and residential care facility in Fort St. John, and the new Royal Jubilee Hospital in Victoria would all be built at higher prices. This would mean tens of millions MORE in construction costs on these projects alone.

THE REAL RESULT (WE SAY):
This is a deficit growth plan, not a reduction plan. Their additional spending gets deeper every year. They are depending on new revenue that may never materialize to fill that growing gap. It simply isn’t credible.

As shown below, when you set aside their unrealistic revenue projections, the combination of their new spending deficit along with the existing deficits in the fiscal plan could result in a spending gap of up to $4.4 billion over the next three years and significant job losses as a result.

FURTHER COST EXPOSURE
Having already noted the nearly $500 million in shortfalls to their plan due to their erroneous underestimation of carbon emissions tax revenues, there are also questionable cost estimates within their specific plan.

An early analysis reveals just a few examples:

Their broad commitment to end homelessness in five years and build 3,600 units is funded with only $15 million in operating and $250 million in capital. The actual cost of the capital alone is closer to $1.1 billion, and operating costs are likely well in excess of the $15 million budgeted – especially if those facilities had necessary services for our vulnerable.
They commit to creating “Community Energy Trusts” and to a new program Worker Transition Program for displaced workers. There is ZERO funding provided for these initiatives, which, if implemented, would have significant costs. For example, their previous commitment to match the Community Development Trust would be a $129-million expense.
They commit to extensive improvements to Healthcare including shorter wait times, more beds for seniors, new surgical rooms and diagnostic centres, more nurses and more mental health. Yet they only provide $275 million by their third year to support that – a barely 1.5 per cent increase to the currently planned spending of $17.513 billion in 2011/12.
Their particular commitment to building 3,000 new long term care beds and reopening 300 beds: they have budgeted $210 million in capital and $130 million in annual operating. In reality, it would cost closer to $1 billion in capital to build those, and real operating costs are around $240 million a year.
They commit to extensive K-12 Education improvements such as smaller class sizes, reducing school closures and more teachers and instructors. Yet they only provide $100 million by their third year to support that – a less than two per cent increase to the currently planned spending of $5.836 billion in 2011/12.
They commit to extensive improvements to childcare, income assistance and programs for worker struggling in the economy. Yet they only commit $90 million in their third year for these programs -- a less than three per cent increase to the currently planned spending of $3.393 billion in 2011/12.

Finally, nowhere in this plan does the NDP provide any additional funding for wage increases for groups currently seeking a renewed contract during the next three years.

WHAT WILL THEY CANCEL?
It has already been highlighted that they will cut $1.3 billion from government work contracts and grants to communities – but what else won’t they fund? While they say they are only building on the current fiscal plan, they cite a mysterious $300 million over two years in “Capital Reallocations” they do not identify.

So which projects will they cut? Could it be:

The BC Place roof improvement: Carole James stated they would not proceed with this $365 million improvement despite the hundreds of jobs construction it creates, and the tens of millions in economic benefits from hosting the Grey Cup and the Vancouver Whitecaps MLS soccer franchise.
The new Port Mann Bridge: Carole James has called it “the wrong bridge and the wrong plan”, and voted against the legislation that would help build it.
The South Fraser Perimeter Road: The NDP have rallied against the plan, despite the value to our economy and the resulting $1.5 billion in annual savings in congestion as a result of this and related Gateway infrastructure improvements.
Or any one of the $2.8 billion in recently announced projects by the government as part of the $14 billion stimulus program:

Northern Cancer Centre in Prince George
Nanaimo Regional Hospital expansion
Nelson and Invermere hospital expansions
West Kelowna Urgent Care Centre
Pine Pass upgrade in Prince George
4-laning on Cariboo Connector
4 lane bridge replacement in Mission (Wren to Nelson)
Loop Bridge in Sparwood
New Franophone School in Comox
New School University Hill in point Grey
New North Saanich Middle School
New Grief Point Elementary in Powell River
Neighborhood of Learning in Williams Lake
Neighborhood of Learning in Oliver
$50 million in new schools and school upgrades in Coquitlam

BOTTOM LINE? THIS PLAN IS SIMPLY DISHONEST AND IT’S NOT CREDIBLE.
This plan will not result in a balanced budget in four years; in fact, deficits would likely spiral for years down the road. They are not accurately reflecting the real costs of their commitments, they are spending too much with no end in sight, and their predicted revenues don’t pass muster and can never make up the shortfall.

Their spending plan itself is unfocussed and unlimited, with many of their estimates clearly falling far short of the real cost. In exchange for these minor commitments across government, taxpayers and their children will be bearing a significant, long-term legacy of deficit spending and an end to government fiscal prudence.