Has BC's economy turned the corner?

May 7, 2004

Over the past three years, BC's public policy landscape has been reshaped. The Campbell government has implemented wide-ranging measures--most of which have been long sought by BC business--in the name of making the provincial economy more "competitive."

While this economic "medicine" has been hard to swallow for many--including hospital workers, people on welfare, students and the elderly--others see it as the price to be paid for a booming economy. But has the medicine been the miracle cure that was promised?

The early results suggest that there has been a lot of pain for very little gain. There are some signs of life in the provincial economy, such as strong residential construction. But the statistics do not point to a boom on the horizon.

At the broadest level, economic growth has been unspectacular, both in comparison to the rest of Canada and compared to recent BC history. The province emerged from a recession in 2001, but recent economic growth rates have been modest--the economic equivalent of treading water. They are not fast enough to generate a huge expansion of employment and rising incomes, but enough to keep us afloat.

In 2003, BC's real GDP growth rate dropped slightly to 2.2% from 2.4% in 2002. The forecast for 2004 of 2.9% would be an improvement if it materializes. But all of these growth rates are lower than the 3.2% growth rate posted in 1999 or the 4.8% rate in 2000.

In terms of personal income, BC was passed by Quebec in 2003, and we now sit fourth in the provincial standings. What is more alarming is how much borrowing British Columbians are doing to finance current consumption. In 2003, British Columbians borrowed 8.2% of their income, up from 5.1% in 2002.

Perhaps the biggest disappointment is continued weak capital investment outside of residential construction. The fact that investment has not responded to almost $1 billion in corporate tax cuts, $1.5 billion in personal income tax cuts and a slew of deregulation and other initiatives is a major indictment of the government's program.

A related promise was that tax cuts would positively affect incentives for workers to work longer and harder. Again, there is no evidence that this has taken place. Employment and earnings indicators suggest that there has been little response at a microeconomic level to the tax cuts. Hours worked have declined (in line with recent trends), and the employment rate is little changed from levels in the 1990s.

Any good news on the employment front has more to do with interest rates than tax cuts. Low interest rates have fuelled new residential construction and encouraged more consumer borrowing. This led to improved employment growth in 2003, although growth rates are still middle-of-the-road by historical standards.

It is still too early to make definitive assessments of the government's program. But there is no reason to believe, based on the data available to date, that the economy has performed as advertised in response to sweeping reforms.

The reality is that the BC economy is a complex entity. The provincial government is one player, albeit an important one. But most of what happens to BC is determined outside Victoria. To expect economic miracles from tax cuts is merely wishful thinking.

It is fair to say that BC has had its share of bad luck. The September 11, 2001 terror attacks reduced international travel volumes, hurting BC's tourism industry. The ongoing dispute with the US over softwood lumber has led to mill closures and layoffs in the forest industry. BC also endured SARS, mad cow disease and forest fires in 2003.

But these events affected the rest of Canada as well (the exception being forest fires, which paradoxically, in short-term GDP terms were a net gain due to the wages paid to firefighters). BC's weak performance relative to other provinces that face the same external environment is troubling.

In terms of big picture economic performance, the "new era" looks a whole lot like the old one. But with some important trade-offs. Higher-income British Columbians were the principal beneficiaries of the government's tax cuts. Lower- and middle-income folk did not get much of a tax cut, but are facing diminished public services and higher out-of-pocket costs.

An economy's success should ultimately be measured by the improved, sustained livelihoods of its people. The idea that people must be sacrificed--through layoffs, lower wages, and punitive social assistance policies--for the good of the economy is both foolish and dangerous. Despite the hardship imposed on many British Columbians, prosperity is as elusive as ever.

Marc Lee is an economist with the Canadian Centre for Policy Alternatives and the author of State of the BC Economy 2004.

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