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Finlayson Op-Ed: A closer look at the 2017 BC Budget (Business in Vancouver)

Parsing the details of the Liberal government’s 2017 budget offers a number of insights into British Columbia’s $270 billion economy. The first and most significant is the advantage conferred by economic and industrial diversification. While housing starts are projected to slow in 2017 and B.C.’s leading export sector – wood products – is poised to contract as the Canada-U.S. softwood lumber trade dispute flares up again, the overall economy continues to tick along. This speaks to B.C.’s attractive mix of export industries – energy/mining, forestry, agri-food, tourism, non-resource manufacturing, and scientific, technical, financial and educational services – together with solid growth in domestic demand fed by in-migration and high levels of construction spending. All of this created a favourable economic backdrop as Finance Minister Michael de Jong fashioned his pre-election budget.

A second point evident from the wealth of information presented in Budget 2017 is that even though natural resource industries now represent 12 per cent of B.C.’s gross domestic product -- down from roughly 30 per cent four decades ago -- the state of commodity markets still plays a role in determining the province’s fiscal performance. Consider that a 50 cent move in natural gas prices has a $140 million impact on the government’s bottom line, while a U.S. $20 drop in metallurgical coal prices would shave $50 million from Victoria’s annual revenue haul. A 10 per cent decline in timber harvesting volumes would cost the government $100 million a year in lower direct forestry revenue. And that’s only part of the story: the health of B.C.’s resource industries also affects how much the government collects in income, sales, water, fuel and carbon taxes, as well as the net earnings of B.C. Hydro (which are consolidated into the government’s books).

Finally, the budget confirms that the prevailing patterns of demographic and economic growth in B.C. vary markedly across the province’s eight development regions. In particular, the lower mainland has driven most of the growth in our economy over the last few years. And with net immigration remaining heavily concentrated in and around Metro Vancouver, the region’s dominance is likely to be further reinforced as time passes.

Turning to the spending and taxation elements of the new budget, B.C. enjoys an enviable fiscal position relative to other provinces. Despite a planned $4 billion jump in total government spending between 2015-16 and 2018-19, the province expects to post small operating surpluses ($200-300 million) over the next three years, on the heels of $1.5 billion of black ink in 2016-17. At 16 per cent of GDP, B.C.’s net debt is among the lowest of all provinces, giving the government room to ramp up borrowing for capital projects without jeopardizing its prized triple A credit rating. (There is a caveat here: B.C. Hydro’s rapidly growing debt – up by some $10 billion since 2010 – is not counted as part of the government’s “tax-supported” debt; if it was included, the province’s financial picture would look less rosy.) Given the cautious economic assumptions underpinning Budget 2017, there’s a good chance that actual fiscal results will turn out to be better than Minister de Jong is projecting.

Budget 2017 announced some useful tax reductions – notably lower MSP premiums and the removal of sales tax from business purchases of electricity – along with increased spending in a few high priority areas. A half point reduction in the small business income tax rate will be welcomed by entrepreneurs as well as the many incorporated professional service providers who, arguably, are the principal beneficiaries of the preferential small business tax rate.

Looking ahead, the province still has work to do lay the foundations for a more productive, competitive and innovative economy. Specifically, the next government will need to act on the outstanding recommendations of the Commission on Tax Competitiveness, which was tasked with developing a

blueprint for a modern, investment-friendly B.C. business tax regime. Another priority is to boost funding for post-secondary education and research, with a particular focus on STEM disciplines, the IT sector, and health. As fiscal circumstances permit, there is also a convincing case for expanding child care and early childhood development programs, ideally via a targeted approach that directs public funding to low- and middle-income households with young children. Finally, B.C.’s growing population and our position as Canada’s gateway to the Asia Pacific mean we must continue to develop new and refurbish existing transportation infrastructure. Government has already made substantial investments in this domain, but more needs to be done to improve public transit services and increase the efficiency and capacity of road networks in the lower mainland.  

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer.

Published in the February 28th edition of Business in Vancouver.