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Finlayson Op-Ed: B.C.’ s industrial economy is fading (Vancouver Sun)

Statistics Canada recently reported that B.C.’s economy grew by 3.2 per cent after inflation in 2014, putting B.C. second among the provinces. Gains in residential and commercial construction and a solid advance in consumer spending were the key contributing factors. The job market, however, was surprisingly subdued, with employment rising by less than 1 per cent on a year-over-year basis.

As the clock winds down on 2015, it appears that B.C.’s macro-economy continues to perform fairly well, at least by Canadian standards. Economic growth should end up exceeding 2.5 per cent this year, with strength in retail sales, housing-related activity, tourism, film production, and parts of the advanced technology sector. At a time when Canada’s economy is being pummeled by a deep slump in global oil and metals prices, B.C. is holding its own.

Yet if we look below the surface, the economic picture in the province is less favourable. In particular, what might be described as the “industrial economy” is clearly struggling, with negative implications for business investment and exports.

The “industrial economy” consists of primary resource extraction and related downstream processing in the forestry, mining, and agricultural sectors; the production, transmission and exporting of energy; oil and gas refining, chemical production, and cement/concrete manufacturing; food processing; plastics; non-metallic minerals; metal fabrication; primary metal manufacturing; and beverage manufacturing industries.

Taken together, the industries carry significant weight in our economy. Collectively, they employ almost 200,000 British Columbians, most of whom enjoy wages and benefits that surpass the average. These industries also represent an important source of demand for the outputs of many B.C. service sectors, including transportation, engineering, scientific and technical services, other professional services, environmental consulting, and financial services. Perhaps most strikingly, the enterprises that comprise the industrial economy dominate B.C.’s export base, accounting for around four-fifths of the province’s international exports, year after year.

Why are many of these industries struggling? Low commodity prices and weak global growth are among the culprits. But there are also homegrown factors that shape the competitive landscape and which B.C. policy-makers should be paying close attention to.

First, the industrial economy has been hurt by the restoration of the provincial sales tax. The return of the PST has increased the cost of producing goods in B.C. by hundreds of millions of dollars a year. Most industrial firms either export what they produce or compete with imports in the domestic market. Because they have little influence over the prices of internationally traded goods, higher production costs attributable to government policies cannot be passed to customers; they must be absorbed in the margins of producing firms. In this way, the PST has delivered a blow to the cost competitiveness of B.C.’s industrial economy and is dampening new investment in the affected sectors.

A second challenge is the carbon tax. While economists generally agree that pricing carbon is a sensible way to help reduce greenhouse gas emissions, British Columbia has moved faster and more aggressively than other provinces and American states. This has pushed up fuel costs here compared to other North American jurisdictions, raising production and shipping costs for many local resource and manufacturing companies.

A third challenge is rising electricity rates. While the price of power remains below that in most other provinces and states, B.C.’s traditional cost advantage is dwindling, in part because electricity prices are stable or declining in a number of other North American jurisdictions. The government and BC Hydro are working to address this issue, but policy-makers need to recognize that higher power costs have implications for business competitiveness.

The impact of ever-increasing provincial government fees and other non-tax levies imposed on business also enters the competitiveness equation for a number of B.C. industries. Added to this are the costs associated with inefficient and cumbersome regulatory systems and frequent delays in permitting and project approval processes.

A final source of concern is local government, with some municipalities continuing to impose excessive and even punitive property tax burdens on production facilities and infrastructure assets in the natural resource, manufacturing and telecommunications sectors.

Add it all up, and the industries that form the backbone of British Columbia’s export base have seen government-influenced costs march higher and their competitive positions erode. Recognizing and starting to tackle this problem should be a top priority for next year’s provincial budget.

Jock Finlayson is Executive Vice President and Chief Policy Officer with the Business Council of British Columbia.

As published in the Vancouver Sun.