Finance Minister Carole James is scheduled to table her government’s new budget today. The external economic backdrop for Budget 2020 is unsettled.
The global economy has been rocked by disruptions to travel, trade and production caused by the deadly coronavirus, with China — the world’s second-biggest economy — suffering the most. At this point, it is unclear when the virus will peak, how far it will spread, and how much damage will be done. At a minimum, global economic growth in the first quarter of 2020 is certain to be marked down and China itself will experience a sharp fall-off in economic activity. B.C. will also feel the effects via lower commodity prices, reduced trade flows, and fewer tourists from China and perhaps other Asian markets.
Meanwhile, Canada managed to crank out meagre economic growth of 1.6 per cent last year, and 2020 is likely to see a repeat performance. While the job market has been quite strong, Canada’s economic expansion remains unhealthily dependent on population growth and spending by increasingly indebted households. Federal policymakers have been waiting for a “rotation” that would see economic growth supported by a sustained pick-up in exports and business investment, but so far that scenario has failed to materialize.
How do things look for B.C. on the eve of the budget? Over the past 12 months, many economic indicators have softened. Retail sales stagnated and job growth almost shuddered to a halt last year. The value of B.C.’s exports fell by almost seven per cent, and manufacturing shipments also declined.
On the other hand, some sectors have been doing well, including advanced technology, tourism, and scientific, technical and professional services. B.C. housing starts surprised to the upside in 2019, although they are expected to lose ground this year. Non-residential construction has been volatile, but it is poised to surge in 2020-21 thanks to the LNG Canada project, continued work on Site C, and several other major capital projects in both the private and public sectors.
Like Canada, B.C. is now relying disproportionately on a rising population to underpin economic growth. Our population is climbing by close to 1.5 per cent annually, driven by international migration. At the same time, overall economic activity, as measured by inflation-adjusted gross domestic product (GDP), is projected to increase by around two per cent a year going forward. The problem with this arithmetic is that GDP on a per person basis is barely growing, inching ahead by around 0.5 per cent per annum. At this rate, it would take over 130 years to double real income per B.C. resident.
How to raise the bar on economic growth? A bigger population, by itself, doesn’t do much to lift per-capita GDP or average incomes. Instead, policymakers need to focus on increasing productivity, accelerating investment in machinery, equipment, digital technologies and other assets that support innovation, and scaling-up more B.C.-based companies.
The NDP government says it wants to see more “value-added” production and higher wages for B.C. workers. Realizing this vision depends on stronger investment in productivity-enhancing assets. It also requires establishing an environment where more of the vast numbers of small firms operating in B.C. grow into significant-sized businesses. The latter goal is important because bigger firms, on average, invest more, have higher levels of productivity, pay their employees more, and have a greater propensity to export.
Unfortunately, improving productivity and scaling-up B.C. firms have not been government priorities in recent years. In the upcoming budget, the government should pivot toward an agenda that seeks to make B.C. a top-tier jurisdiction for growth-oriented companies, ambitious entrepreneurs, and talented innovators. This calls for a somewhat different mix of policies than the government has adopted so far. When the budget is tabled, our assessment of it will hinge on the extent to which it puts the province on the path to a more prosperous future.
Ken Peacock, chief economist and vice-president, and Jock Finlayson, chief policy officer and executive vice-president, are with the Business Council of B.C.
As published in the Vancouver Sun.