Dec 3, 2009

Vancouver City Budget Woes: Are the Cuts Really Necessary?


In this round of municipal budgeting, the city of Vancouver finds itself in exactly the same predicament as the federal and provincial governments faced earlier in the year – projected revenues would not be sufficient to meet their rising expenditures. The big difference is that municipal governments are prohibited by law from running a deficit.

This isn’t the kind of balanced budget law that we had at the provincial level – the kind that can be amended at the government’s convenience. Oh, no. We’re looking at a real binding law here.

(Well, almost always binding – the Vancouver Charter was amended a year ago to allow the city to borrow $458 million to fund the Olympic Village without having to go to the people first. But I digress.)

To cut services or increase taxes and user fees: that is the question.

On December 1, City Council announced their plans for balancing the books: a combination of both cuts and tax increases. It’s not looking good, as Frances Bula summarizes in her Globe article:

Vancouver will see the loss of 177 jobs at city hall, the closing of a landmark conservatory and a children’s petting zoo, dramatic hikes in parking charges, the elimination of the city’s high-profile summer street banners and reductions in everything from library hours to after-school childcare.

City Council’s decisions have left many wondering whether the city’s fiscal health will be achieved at the expense of the overall health of the city. Despite recent activity in Vancouver’s real estate market, we’re far from a robust recovery. Cutting municipal spending and jobs at this time would act as an additional drag to the economy exactly when we need to think about boosting future growth.

The worst part is that cutting services and closing attractions (as if Vancouver has that many to begin with) is only necessary in order to fund a tax break for commercial property owners in the City. This is effectively the result of a decision made by the previous city council (and supported by Mayor Robertson) to shift a portion of business property taxes onto residential property owners over a period of five years.

Think City is among the most vocal critics of Vancouver’s proposed budget. Their key points are outline in a recent Georgia Straight article Vision Vancouver looks after business with tax shift. Think City’s proposal is to defer the tax shift for a year and instead implement a 4% property tax increase on both residential and non-residential owners (instead of the currently proposed increases of 4.3% for residential and 0.3% for non-residential properties). This is estimated to cover almost the entire current shortfall of the city, making service cuts unnecessary.

While reducing the share of taxes paid by businesses can stimulate the economy, paying for this tax reduction through cutting municipal services is not the best bang for the buck. From a macroeconomic perspective, modest tax increases are better that service cuts for meeting the city’s shortfall. This is because macroeconomic models that estimate the multiplier effects of fiscal changes to the economy consistently show that tax increases have somewhat smaller drag at the local economy than spending cuts.

It makes sense: businesses can deduct the property taxes they pay from their provincial and federal taxes, so the income reduction that comes from a business tax increase is not as big as the income reduction from a lost job.

It’s no different at the municipal level than it is provincially or federally – tax cuts are a leaky economic stimulus, while spending on service provision ensures that the money spent benefits the local economy.

Additionally, many of this year’s Vancouver budget woes stem from Olympics-related costs (for example, the City is said to be losing $1.8 million in parking fees because of Olympics-related street closures next year). Guess who’s going to benefit from the Olympics related tourism? That’s right, it’s not the home owners, it’s Vancouver’s service and tourism industry. They should pay their share of the costs, too.

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