The BC NDP government’s 2022 Budget, tabled last month following the release of its economic plan, provides a basis for assessing how Premier John Horgan and his colleagues intend to move the province forward as the protracted COVID-19 crisis (hopefully) winds down.
Budget 2022 is underpinned by what we judge to be prudent economic assumptions, bolstered by ample contingency funds set aside to help the government manage future shocks and risks. As Russia’s invasion of Ukraine continues to unfold and oil prices spiral upward, it is reassuring to know that B.C.’s fiscal plan includes a sizable financial cushion.
The good news is that B.C.’s books are in better shape than most analysts were expecting a year or so ago. The operating deficit for 2021-22, which was initially projected at almost $10 billion last year, will now likely show a small surplus. This dramatic turnaround reflects surging government revenue due to a rebounding economy and much higher-than-budgeted revenue from personal and corporate income taxes, resource royalties, property transfers and a turnaround in the finances of ICBC (a large Crown corporation whose profits and losses flow directly to the government’s bottom line).
Significant COVID-related cash transfers courtesy of the federal government also contributed to the improved financial situation. Unfortunately, the 2021-22 revenue boost is temporary, with the finance minister projecting a drop in revenue in the coming year and very modest increases thereafter.
Slower revenue growth combined with more government spending translates into multibillion-dollar operating deficits for the next three years. When added to hefty borrowing to fund the construction of capital projects, the accumulated public debt rises steeply in absolute terms, and it rises as a share of gross domestic product (GDP). Before COVID-19 arrived, the province’s net debt stood at 15 per cent of GDP. Today, it amounts to nearly 18 per cent. And according to the budget, the debt is on track to reach 23 per cent of GDP by 2024-25. We have trouble justifying a rapidly growing debt/GDP ratio at a time when the economy has little spare capacity and interest rates are poised to move higher after years of super-accommodative monetary policy. Particularly concerning is that the government is forecasting operating deficits in the post-COVID context that are larger, in dollar terms, than those incurred in the midst of the pandemic.
Apart from excessive and arguably ill-timed fiscal stimulus, Budget 2022 and the government’s new economic plan suffer from two other weaknesses.
The first is a conception of the economy and the economic growth process that is heavily public sector oriented. Over time, gains in economic well-being mostly stem from entrepreneurial ambition and wealth creation that results from the spread of innovative technologies and improved management practices, the expansion of existing firms, new hiring and jobs and higher productivity. The Horgan government leans toward a somewhat different vision, one where the government exercises a strong influence in private sector investment and other business decisions. We doubt that a more expansive and intrusive government is a pathway to greater prosperity, particularly in a jurisdiction that already has a large public sector. In our view, neither the budget nor the economic plan adequately recognizes the central place of a thriving business sector in B.C.’s economic success.
A second weakness is that policymakers aren’t paying enough attention to the business environment facing B.C.’s export industries. As a small jurisdiction, B.C. must find a way to pay for the vast array of imported goods and services required to operate our economy and maintain a high quality of life. The only real option is to ensure we have a suite of globally competitive export industries to “pay the bills.” Yet, the province is doing comparatively little to make B.C. an attractive place for investment and business growth in the natural resource and manufacturing industries that supply the bulk of B.C.’s exports. Kick-starting the struggling tourism sector – another important export engine – should also be a higher priority.
Budget 2022 and the economic plan do include measures to accelerate the growth of the life sciences, health research and clean technology sectors. The province is also earmarking new funding to close the digital divide. And it will add more technology-related seats in B.C.’s post-secondary institutions. All are positive steps.
But overall, the NDP government seems rather complacent about B.C.’s place in a fast-changing and fiercely competitive world. Policymakers need to do more to improve the investment climate and strengthen the foundations for stronger future growth in incomes and living standards. •
Jock Finlayson is the Business Council of British Columbia’s senior policy adviser; Ken Peacock is the council’s senior vice-president and chief economist
As published in Business in Vancouver.