Back in the Great Recession, real per capita GDP in B.C. fell for two consecutive years so that by 2009 it was 4.7% lower than in 2007.
This means that adjusted for inflation, the output of all goods and services produced in the economy measured on a person basis – a broad, if imperfect, measure of prosperity – fell by almost 5%. The damage to prosperity lingered. Real per capita GDP didn’t regain its 2007 level until 2012.
Turning to the pandemic-induced recession of 2020 and the subsequent recovery that began by mid-year, new data from Statistics Canada indicate that real per capita GDP declined 4.9% in 2020 as a whole, slightly more than the cumulative two-year drop during 2008-09.
Governments, when faced with a downturn, typically use fiscal policy to support the economy. Spending rises in tandem with higher unemployment. At the same time, the fall-off in economic activity results in a temporary dip in tax revenues. In fiscal 2009-10, the province ran a $1.8 billion operating deficit, equivalent to about 1% of GDP. In the following year, the deficit dwindled to $247 million, or just 0.1% of GDP.
The 2020 COVID recession has had a much bigger fiscal impact, causing the provincial government to post an operating deficit of $8.1 billion, or 2.8% of (nominal) GDP last year. According to the budget tabled last month, the BC NDP plans on running an even larger $9.7 billion deficit (3.1% of GDP) in the 2021-22 fiscal year.
In sum, the decline in prosperity in B.C., as proxied by real GDP per person, has been steeper and somewhat larger in the COVID recession than in the earlier 2008-09 slump. But the fiscal response and the hit to provincial government revenues have been much greater this time around, such that the cumulative two-year budgetary shortfall is likely to end up being six times larger.
The good news is that forecasters predict a vigorous economic rebound in the next two years, albeit with bumps along the way. The global economy is strengthening, commodity markets are surging and we see supercharged spending by governments (especially federally but also provincially). In the near term, this combination points to a pickup in GDP growth.
If economic growth (after stripping out inflation) in B.C. averages 4.5% over the next two years, real GDP per capita will regain its pre-recession (2019) level some time in 2022. If the recovery turns out to be more muted or falters, per capita GDP would trace a slower recovery path – more aligned with what happened in the previous cycle. In the latter case, it would take several years for prosperity, as measured by per capita GDP, to get back to the pre-recession level.
In this context, we are puzzled that the B.C. government isn’t more focused on bolstering per capita GDP growth.
True, the province recently announced higher capital spending and new funding to encourage the scaling up of B.C. companies in promising industries. These are welcome steps that should support stronger per capita GDP growth over the medium-term.
But the government could do more. In particular, policy-makers should be looking to accelerate private sector capital construction projects across the economy and speed up approvals for new (and expanded) mines to provide a quick economic lift amid the global bull market for minerals and metals.
More generally, modernizing and streamlining regulations in all areas of provincial jurisdiction, forcing municipalities to do the same, and reforming the tax system to reduce the dead-weight costs of levying and collecting taxes would also nudge public policy in a pro-GDP growth direction. Even just committing to no further cost increases for B.C. businesses for the next three years would boost the confidence of business investors and company managers. Examining all proposed legislative and regulatory changes through a lens that explicitly considers the likely impact on per capita GDP growth would improve policy-making and shine a light on the unintended consequences that often follow from government decisions.
In short, there are many things the province could be doing, beyond the few measures unveiled in the latest budget, to lay the foundations for a revival of per capita GDP growth and enhance the prosperity of B.C. residents. Given the massive amounts of fiscal spending unleashed by governments, it is regrettable that we don’t see more attention being paid to the goal of expanding the economic pie in per capita terms. •
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.