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B.C. is flush, it’s time for more robust investment in the common good

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BY ALEX HEMINGWAY

Canadian Centre for Policy Alternatives

Can B.C. afford to make major new public investments to address crises in housing, climate change, health care, child care and toxic drugs, among others?

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The simple answer is yes, can we ever.

A new report from the Canadian Centre for Policy Alternatives’ national office shows that despite dire predictions that the pandemic would be a big blow to provincial finances across the country, most provinces today have enough funds to pay for the important programs and investments that Canadians need to survive and thrive.

A close look at the most-recent figures from B.C.’s Ministry of Finance confirm that big action to address social and environmental crises is well within our power in this province. In fact, the extent of B.C.’s fiscal and economic latitude goes beyond that discussed in the national report.

First, there are huge pools of largely unallocated “fiscal padding” built into the BC government’s budget, amounting to $5.8 billion, $7.4 billion and $7 billion each year over the next three years, totalling $20 billion. This swamps the $5.1 billion in deficits projected cumulatively in that time.

These forms of fiscal padding tend to fly below the radar and are rarely reflected in headlines about BC’s fiscal situation. They have long been part of BC budgets—and long been problematic—but they have recently ballooned to multibillion dollar levels each year.

For example, in the current budget year, fiscal padding includes a $2.8 billion general contingency fund, $2 billion contingency for pandemic-related issues and $1 billion forecast allowance. In the following year’s budget plan, there is a $3.4 billion general contingency fund, $2 billion for unspecified “future priorities”, $1 billion forecast allowance and a $1 billion pandemic contingency fund.

The budget also adds an additional layer of padding by assuming a level of economic growth lower than private sector economic forecasters are projecting, which lowers revenue estimates.

This pessimistic skew in the budget numbers is why you often hear about “surprise” outperformance of budget projections at year-end. In 2021/22, the provincial government originally projected a $10 billion deficit, but by year-end this had turned into a $1.3 billion surplus. For 2022/23, the government originally projected a $5.5 billion deficit, but in its fall fiscal update only six months later it revised this projection to a $700 million surplus.

To be fair, the pandemic has created plenty of uncertainty, but this practice of budget lowballing is not new. The same pattern has played out in all but a handful of the past 20 BC budgets, with the year-end results turning out rosier than the pessimistic budget-day projections.

In fact, the only exceptions to this pattern were the year of the global financial crisis, the time when B.C. unexpectedly had to pay back the feds after eliminating the HST, and a small downward revision in 2019/20 at the very beginning of the COVID-19 pandemic.

Budget lowballing of this kind creates a systematic bias against public spending in BC, distorting democratic debate about the true range of our budgetary and public policy options.

If the goal is to prioritize avoiding deficits above all else, this practice would have some logic to it. But that’s an unwise priority. Whether or not the provincial government runs a balanced budget in a given year is not of any real economic significance. For healthy fiscal management, more relevant long-run measures include the debt-to-GDP ratio (debt relative to the annual income of the economy) and debt service costs (interest payments relative to the size of the budget).

Rather than consistent budget lowballing, BC should set realistic budget projections, recognizing there will be year-to-year fluctuations in both directions. Some years this may mean a larger deficit than expected, sometimes a smaller one, and sometimes a surplus.

More transparent and realistic budgeting would deliver important benefits. First, it would allow us to plan and make policy decisions that are more democratic based on an accurate picture of the resources available. Second, it would dial back the bias against public spending at a time when there is a huge backlog of critical public investments that need to be made.

Skewing the numbers to avoid fiscal deficits at all costs has meant neglecting mounting social and environmental “deficits”, which has helped create some of the big crises we face today. These deficits in social and environmental investment have been particularly severe for the past two decades since the social spending cuts of the Gordon Campbell government.

Beyond the year-to-year budget balance, another measure of our capacity to “go big” to meet these big challenges is public spending as a share of our total annual economic output.

Over the past two decades, BC’s provincial government operating spending has declined substantially as a share of GDP, from 21.5 per cent in 1999/00 to a projected 19.4 per cent in 2022/23. In fact, the most recent budget plans for this to decrease further to 18.6 per cent by 2024/25.

Notably, this picture of the decline is conservative because these figures assume that all of the contingency funds put aside for the upcoming fiscal years will be spent in full. If the contingencies aren’t spent, the projected spending levels for these years would be even lower.

To put this in perspective in terms of raw dollars, if B.C. returned to the spending levels of 1999/00 (as a share of GDP), we would have another $10 billion available to spend on important priorities in the current fiscal year alone (additional to the huge contingency funds discussed above). This figure would rise even further over the next two years.

If we want to increase public spending to tackle big challenges, we have the economic capacity.

How specifically could B.C. fund increased public spending and investment? Borrowing can play an important role and makes sense particularly when funding highly productive social and physical infrastructure investments. Indeed, some public investments—like a major build out of middle-class rental housing—can largely pay for themselves in a direct way.

Increased public spending can also be funded with more robust taxes on the rich, landowners, and corporations, with the dual benefits of raising revenue and reducing extreme inequality.

Even credit rating agencies—often very conservative institutions—recognize that raising additional tax revenue is well within BC’s capacity. For example, Moody’s notes that: “British Columbia’s level of taxation is at the lower end of the Canadian provinces, presenting the province the flexibility to raise taxes… while still remaining competitive with other jurisdictions.”

Besides being a moral necessity, tackling big social and environmental challenges comes with significant economic benefits. One area where this is now being recognized at the federal and provincial levels is the need for universal child care, but it’s also true across a range of policy areas. The flip side of the coin is that inadequate levels of public investment come at an economic cost. Shortchanging the public sector is economically and fiscally irresponsible.

If social and economic well-being each point to the need for increased public investment, what’s holding us back? Part of the story comes down to power. The status quo works well for the wealthy, who exert disproportionate influence in politics and sometimes block needed action.

Last year when economists, health experts and public opinion aligned in calling on the B.C. government to implement a minimum right to 10 paid sick days for workers, big business lobby groups were able to push the government to water down its policy to only five days (even as the pandemic was shining a bright light on the need for workers to be able to stay home when sick).

Another example is taxes on the wealthy. Despite enormous public backing for an annual wealth tax on the super rich at the federal level (nearly 9 in 10 voicing support in polling including 83% of Conservative voters), this policy has been nowhere to be seen, even though it would raise significant revenue and help tamp down the troubling rise in extreme inequality.

We live in an incredibly rich society, but too much of our prosperity flows to the wealthiest few, and too little of it is invested in addressing urgent challenges. This disconnect points to the need to build people power through labour organizing, direct working-class representation in politics, and innovations in our democratic system, among other strategies.

Building people power is no small task, but the fact that we have ample economic and fiscal capacity to invest in the common good should be heartening to organizers and bold politicians alike. Meeting this moment of crisis is within our grasp if organized people can overcome the power of organized money, as they have many times in the past.

Alex Hemingway is a senior economist and public finance analyst at the Canadian Centre for Policy Alternatives, BC Office.

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Need to tap into your investments? Beware of tax traps – BNN Bloomberg

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Inflation has been putting a strain on just about every household budget. In some cases, it’s the increased cost of food. In other cases, it’s the higher cost of servicing debt as interest rates skyrocket. 

If dipping into your retirement savings is the only alternative to make ends meet it’s important to know the tax consequences vary depending on where you draw the cash from.

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Ideally, you will already have some cash in your retirement accounts, but your needs could require liquidating investments. Selling investments in a pinch can be tricky in a market where just about everything is in a slump. A qualified investment advisor can help trim profits, or separate the duds from those poised to realize their potential.

You might also want to consult a tax expert. Any tax pro will tell you to never make an investment decision based solely on tax implications, but the amount of tax you pay on withdrawals often depends on how the money is stored and your personal situation.

NON-REGISTERED INVESTMENTS

There is no tax on cash transfers from a regular, non-registered investment account. If a stock or equity fund is sold to generate cash, however, half of the capital gains are taxed at your marginal rate (the rate you pay based on your overall income).

A capital gain is a profit from the original investment. There is a bright side if you are selling an equity that has gone down from its original value, however. Half of capital losses can be used to recoup taxes paid on capital gains over the previous three years, or can be used to offset future capital gains.       

TFSA: PROBABLY THE BEST IDEA

There is no tax on capital gains, and therefore no tax break from capital losses on investments sold in a tax-free savings account (TFSA).

In fact, there is no tax on any gains or contributions in a tax-free savings account.

Cash withdrawals from a TFSA can be made at any time but for those who contribute the maximum amount it’s important to know that allowable contribution space will not be renewed until the following calendar year.  

HELOC: NO PLACE LIKE HOME

Like a TFSA, money withdrawn from a home equity line of credit (HELOC) or reverse mortgage is never taxed.

Both are loans against the equity in your home and interest is charged on the balance owed. That interest compounds over time until the full loan is paid back; either at the homeowner’s choosing, when the house is sold, or the owner dies. 

Tapping into home equity has been the most common solution for homeowners who need quick cash but rising interest rates have increased the costs dramatically.

The interest rate on a HELOC is tied to the lender’s prime lending rate, which is tied to the Bank of Canada benchmark rate. With more central bank rate increases on the horizon, the interest rate on a typical HELOC has risen to about five per cent from under two per cent in less than a year.

Reverse mortgage rates are tied to conventional fixed mortgage rates, which are also rising dramatically. The fixed rates on reverse mortgages are currently around seven per cent.   

If you repay the balance on the line of credit quickly, the interest cost is capped. If financing is a chronic problem, the best course of action from a tax perspective could be to sell the house. There is no capital gains tax on the sale of a principal residence.  

RRSP: THE LAST RESORT

Registered retirement savings plan (RRSP) withdraws are fully taxable according your marginal income tax rate in the year of the withdrawal (unless borrowed for a fixed term for a down payment on a first home or continuing education).

If you are generating a full-time income from work, you will be taxed at a higher marginal rate than if your income is low.

If you have suffered a loss or drop in income, an RRSP withdrawal could make sense. If you are under 65 years old, a withholding tax will likely be imposed based on the size of the withdrawal. Any amount above the amount you actually owe will be refunded.  

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9 Types Of Investment Assets

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When investing, stocks get the lion’s share of the attention. Investing in individual stocks is one way to grow your wealth, but there are plenty of other investment assets to explore and understand.

Depending on your financial goals, timeline and risk tolerance, you should invest in a well-diversified combination of the following nine assets to build your portfolio.

1. Stocks

Stocks are the basic building blocks of investing. When you buy stocks—frequently referred to as equities—you receive shares of ownership in a public company.

As the company grows and earns greater profits, the value of your shares of stock should appreciate. You may even be entitled to dividend payments as a shareholder.

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Here are four ways to think about the different stocks available:

  • Growth stocks. These are companies that are growing their revenues, cash flow and earnings at rates that are much greater than their peers.
  • Value stocks. Very often, the share prices of perfectly solid and healthy public companies drop well below where they should be, due to larger market developments outside of the company’s control. When a stock’s price is low like this but its business fundamentals are good, it’s called a value stock.
  • Dividend stocks. Companies that pay dependable dividends are viewed as providing shareholder a steady stream of income.
  • Blue-chip stocks. These are the stocks of large, established public companies that have become household names, like Apple, Disney and Microsoft. Blue-chip stocks have a proven track record of dependable performance and a history of regular dividend payments.

To buy stocks, you need an account. You can opt for a tax-advantaged account such as an individual retirement account (IRA), or a taxable brokerage account.

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2. Bonds

Bonds are fixed-income securities that corporations and governments issue to raise money to fund projects. When you buy a bond, you lend money to the issuer. In exchange, the bond issuer pays you interest and, once the bond reaches its maturity date, the issuer returns your original investment.

Bonds are less risky than stocks, but they also offer lower returns. If interest rates rise, bonds become less valuable because new bonds offer higher rates.

To buy bonds, you can purchase them directly from an issuer, or you can buy them through a brokerage account.

3. Cash

When financial professionals refer to cash as an investment, they’re not talking about literal bills and coins. Instead, cash investments—commonly called cash equivalents—are short-term investments that provide stability to your investment portfolio.

Common examples of cash investments include the following:

  • Money market funds. These mutual funds invest in government bonds, tax-exempt municipal bonds and corporate or bank debt securities.
  • Treasury bills. Known as T-bills, these are short-term investments issued by the U.S. government with maturities ranging from four to 52 weeks.
  • Certificates of deposits (CDs). CDs are deposit accounts that usually offer higher rates than savings accounts. CDs have terms ranging from a few months to several years, and the money cannot be touched before the end of the CD term without incurring significant penalties.

Cash equivalents are useful if you have short-term financial goals and will need the money within a few months. They are also appealing to retired investors that can’t afford to take on much risk.

You can invest in cash equivalents through banks or TreasuryDirect.gov. Some brokerage firms also offer brokered CD accounts.

4. Mutual Funds

A mutual fund pools money from investors to invest in groups of stocks, bonds and other securities. Its combined holdings, known as a portfolio, are managed by experienced financial professionals.

There are several types of mutual funds:

  • Stock mutual funds. A stock mutual fund is a collection of stocks chosen by a professional money manager. The fund is typically designed to track a market index, such as the S&P 500.
  • Bond mutual funds. Bond mutual funds invest solely in bonds rather than stocks. These funds provide stability to an investment portfolio and typically have lower returns than stock mutual funds.
  • Balanced funds. These mutual funds own a mix of both stocks and bonds, typically with a fixed asset allocation such as 60% stocks and 40% bonds.

Compared with individual stocks, mutual funds are lower-risk investment assets. By investing in a mutual fund, you diversify your portfolio by owning many stocks or other securities at once.

There are thousands of mutual funds, but we’ve identified the best mutual funds to help you get started. If you’re ready to invest your money, you can buy mutual funds through your brokerage account.

5. Index Funds

Index funds are a form of mutual fund that’s passively managed and best suited for long-term investors.

While many mutual funds are actively managed by professionals who try to beat the performance of a market benchmark, index funds aim to replicate the performance of market indexes, such as the Dow Jones Industrial Average (DJIA) or the S&P 500.

Like standard mutual funds, index funds provide diversification since you invest in many companies or industries at one time. If one company within the fund performs poorly, the other companies within the portfolio may offset the losses.

You can buy index funds through your employer-sponsored retirement plan or your brokerage account.

6. Exchange Traded Funds (ETFs)

Like mutual funds, ETFs pool money from investors to buy baskets of securities, including stocks and bonds. ETFs can track market indices or they can be focused on particular sectors, such as foreign energy companies or domestic technology securities.

ETFs tend to have lower investment minimums than mutual funds, so they’re a good choice for new investors without a lot of cash on hand. Like stocks, they are bought and sold on market exchanges throughout the day.

You can buy ETFs through brokerage accounts and employer-sponsored retirement plans. If you are new to investing, our guide to the best ETFs could be a good starting point for you.

7. Annuities

An annuity is a contract between an individual and an insurance company. When you purchase an annuity, you pay the insurance company in installments or a lump sum.

In exchange, the insurance company agrees to make periodic payments to you for a set period. Many people typically use annuities to get a steady stream of income in retirement.

There are three main types of annuities:

  • Fixed annuities. A fixed annuity pays a guaranteed interest rate for a preset period. Once the accumulation phase is complete, you will receive payments for a set period, such as 10 to 20 years.
  • Variable annuities. A variable annuity does not have a guaranteed interest rate. The interest rate and payments will fluctuate based on the performance of the underlying investments, such as stocks and bonds.
  • Index annuities. With an index annuity, interest and payments are determined by the performance of a stock market index, such as the Nasdaq Composite.

You can invest in annuities by working with an insurance company, bank or investment broker.

8. Derivatives

Derivatives are financial instruments whose values are based on an underlying asset. The three most common types of derivatives are futures, options and swaps.

  • Futures contracts. Futures contracts are agreements to buy or sell an asset at a future date and price. For example, you may agree to buy gold at $1,000 per ounce six months from now. If the price of gold goes up to $1,200 per ounce, you will profit from the difference. However, if the price falls to $800 per ounce, you will incur a loss.
  • Options contracts. These contracts are much like futures, but buyers have the right—but not the obligation—to buy or sell an asset at a future date and price. Call options give you the right to buy an asset, while put options give you the right to sell an asset.
  • Swaps. These are agreements between two parties to exchange cash flows in the future. For example, one party may agree to pay another party a fixed interest rate in exchange for a variable interest rate.

Derivatives can be used to speculate on future price movements or to hedge against losses. However, they tend to be complex, risky investment assets, so they may not be a good idea for the average retail investor.

9. Cryptocurrencies

As an investment asset, cryptocurrency has received a lot of buzz. The most well-known cryptocurrency is Bitcoin (BTC), but there are many others. Top cryptocurrencies include Ethereum (ETH) and XRP (XRP)

Investing in cryptocurrencies is risky, as their prices can be highly volatile. These assets are also not regulated like other investment assets, like stocks and bonds. But that may change as governments take a wider interest in applying more regulations to the sector.

 

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Commonwealth trains Cameroonian officials to attract inward investment

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A workshop, hosted by the Commonwealth Secretariat and the International Institute for investment Treaties, has trained Cameroonian government officials to attract foreign capital by better negotiating investment agreements.

Held in Yaoundé from 22 to 24 November, the workshop was a vital platform for senior legal affairs officials from various government agencies to strengthen their understanding of bilateral investment treaties and necessary policies to limit their negative impacts, including lawsuits.

Negotiating bilateral investment agreements is a policy issue for developing countries. Most such treaties are signed between capital-exporting developed countries and capital-importing developing nations.

Despite their positive impact, clauses of bilateral investment treaties can impose constraints on host countries. For instance, investors can sue governments if national policy harms their interests. These investor-state lawsuits are often unpredictable and can cost taxpayers a significant amount of money.

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Opening the workshop, Chinmoun Oumar, Permanent Secretary of Cameroon’s Ministry of External Affairs, thanked the Commonwealth Secretariat and the International Institute for investment Treaties for hosting the “timely” workshop.

He informed the participants that Cameroon was involved in several ongoing negotiations related to investment facilitation, but it lacked sufficient expertise to fully engage with its foreign partners. Oumar hoped the workshop would enable “Cameroon to build a formidable team of legal experts who could contribute to the ongoing and future negotiations”.

Speaking at the workshop, Opeyemi Abebe, Head of the Commonwealth Secretariat’s Trade Competitiveness Section, said:

“This workshop will enable Cameroonian officials to better promote and protect their national economic and development interests. We hope officials will now have a greater awareness of the implications of bilateral investment treaties for national policy and how to mitigate them, ensuring that foreign investment flows contribute to their country’s development objectives.”

The workshop featured a series of plenaries and best practices to help Cameroonian officials rethink what obligations they should include in their future investment agreements and whether to reform existing treaties in line with national interests. Participants also discussed investor-state dispute settlement practices and a roadmap to reform Cameroon’s investment treaties, especially in view of the Africa Continental Free Trade Area (AfCFTA).

The workshop was hosted at the request of Cameroon’s Ministry of Mines, Industry and Technological Development and Ministry of External Affairs.


Media contact

  • Snober Abbasi Senior Communications Officer, Communications Division, Commonwealth Secretariat
  • T: +442077476168 | E-mail

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