The Vancouver hearing kicked off this year’s budget consultation process, a month-long opportunity for British Columbians share their priorities and recommendations for next year’s provincial budget with a legislature committee made up of representatives of both the party that is in government and the Opposition.

The Select Standing Committee on Finance and Government Services will accept citizens’ input until October 15. You can sign up to present in person at a public hearing in your hometown, you can submit written recommendations or video/audio clips, or you can respond to a brief online survey with open-ended questions.

This year, it’s particularly important to make your voice heard, because there are actual money on the table that are not spoken for. Just last week, the Ministry of Finance revealed — surprise — $2.7 billion extra revenues over the next three years above and beyond last year’s budget forecast. In the same news release, the Ministry announced that about $600 million of the moneys would be applied to reducing the deficit, but the other $2.1 billion are yet to be allocated.

Personal income tax cuts have been floated as a possibility and given the current HST mess, the temptation to appease the anti-tax vibe in the electorate must be higher than ever. There are also calls in the media for the windfall revenues to be put towards further reducing budget deficits and paying off the provincial debt.

At the CCPA, we believe that the money should be used instead for strategic spending initiatives to reduce poverty and homelessness in the province. Here is why.

Debt-reduction is not a priority for our province at this point. Our debt levels remain affordable and the current environment of low interest rates presents an ideal time for the government to borrow in order to invest in improving the economic security and future productivity of British Columbians.

The rate of return on debt-reduction is the interest rate we pay on the debt (this is how much we save if we pay a portion of it today). The long-term interest rates the province pays on its debt are around 4 to 4.5%. Many public investments have higher rates of return that that, which makes them better candidates for government spending than paying off the debt.

Using the $2.1 billion windfall revenues to offer personal income tax cuts would frankly be irresponsible. It will squander the opportunity to boost the economy and address BC’s pressing social problems all at once. Tax cuts will not do anything for the poor or the homelessness who don’t owe much in taxes to begin with. Tax cuts will not build affordable housing, improve access to post-secondary education for low-income youth, or reduce our greenhouse gas emissions. Strategic public investments, on the other hand, can do all these things.

The CCPA recommends that the revenue windfall is used to reduce poverty and homelessness in this province. Investing in poverty reduction has the potential to bring huge savings for the province over the long term in terms of lower criminal justice costs, lower healthcare costs, and higher school achievement and productivity. A report from the Ontario Association of Food Banks estimates that poverty cost the provincial treasury about 2% of GDP per year. If costs in BC are in the same ballpark, we’re talking about potential savings of $4 billion annually.

… B.C.’s public accounts for the fiscal year 2009/2010 conclusively prove that the pre-election fiscal plan foisted on British Columbians by Premier Gordon Campbell and his BC Liberals on Feb 17, 2009 was the worst — the most egregious, the most deceptive — “Fudge-it Budget” in provincial history.

The public accounts show that the Campbell Liberals inflated revenues in Victoria’s main operating account, the Consolidated Revenue Fund (CRF), by a stunning $2.558 billion — yes, Billion — with taxation receipts alone overstated by $2.1 billion.

Even under the broader GAAP (generally accepted accounting principles) presentation, the Campbell government exaggerated last year’s expected revenues by a whopping $1.3 billion.

The result: a gargantuan shortfall of $1.779 billion for fiscal 2009/10 — nearly four-times higher than Campbell’s oft-repeated, pre-election pledge of a deficit no bigger than $495 million.

Back in early 2009 before the Budget was released, we crunched some scenarios of the fiscal outlook, noting many concerns about the state of the provincial economy moving forward. We started with the rosy estimates of the Ministry of Finance, which bases its projections on the average private sector forecast coming from the MoF’s Economic Forecast Council (a long time ago, we used to be part of this autere group but got cut after the Liberals came to power in 2001).

Noting that the EFC figures were too rosy, we then modeled the impact of two recession scenarios. Preliminary GDP data for 2009 are still not available, but we used different estimates of GDP to project revenues, and in our pessimistic scenario, this resulted an estimated deficit of $1.6 billion.

So we were off a bit but not by much – and since the economics department over here is Iglika, unlike the army of number-crunchers over at the MoF, I think we did alarmingly well. In contrast, the 2009 Budget projected a deficit of only $495 million. At the time we commented:

… those deficits may be much larger before this is all over. Spending pressures for social assistance could rise much more than currently forecast. A challenge is in interpreting the government’s revenue forecasts. In years past, tax revenues have been grossly understated leading to large “surprise” surpluses at the end of the fiscal year compared to budget time. This year those revenue projections look to be more reasonable, although it will be interesting to see what the final tallies for 2008/09 will be to get a more accurate baseline (we will not know until summer). That said, given the recession, the budget projects an increase in some tax revenues predicated on growing personal income of 1.7% and growing consumer expenditures of 1.9% in 2009. This seems unlikely, and so we could easily see bigger deficits before this is all over. Added to this is the fact that there are no forecast allowances in this year’s budget, because that would make the deficits look larger (it was only OK to make surpluses look smaller).

These cuts have been devastating to many service delivery agencies and will result in the cancellation of programs that benefit the least fortunate in our society: children growing up in low income families, women at risk of violence, the poor. In a recent news release, the CCPA has called for the government to repeal all the cuts made since the February budget.

Make no mistake: these cuts are made because our provincial government wants to end up with a smaller deficit at the end of the fiscal year, not because we cannot afford to help vulnerable groups during a serious recession. Despite the recession, BC is one of the wealthiest provinces in this country. Our provincial debt is relatively low. We certainly have the capacity to cushion the blow of the economic downturn to the more vulnerable individuals and families among us. But our government is choosing not to.

In fact, in their obsession with minimizing the size of the deficit, our policy-makers are pushing people into further hardship. And those who have to endure the pain are those who can least afford it. Kudos to Bill Good for recognizing this simple fact on his CKNW show this morning.

The savings from reduced government grants to social service agencies are $354 million, a mere 0.9% of the overall $40 billion provincial budget for 2009/10. These cuts could easily have been accommodated in only a slightly higher deficit.

The recession is temporary, and so are the current deficits, but the lost educational opportunities for children would never be recovered. It’s penny wise but pound foolish to cut funding to programs that have already been pared to the bone and that provide services with long-term payoffs.

The government is trying to create the impression that cuts are concentrated among “nice to have” but non-essential programs. This is simply not the case. Many of the initiatives that are now being cut have been set up to fill a need that exists because the government is not providing adequate social services and supports out of its core budget. Literacy initiatives, supports for violence against women and children or seniors’ activity programs that keep people healthy and out of hospitals should not be left to the whim of discretionary grants funding. We need to ask ourselves questions such as whether we prefer to pay for programs that enrich the lives of disadvantaged children as they grow up, or for policing and anti-gang measures a few years in the future.

The secrecy with which these cuts have been implemented is also egregious. Without knowing exactly what is being cut, we cannot evaluate the impact of the cuts, and without openness and transparency it is simply not possible to have an honest public debate about priorities. This is why we’ve launched our own effort to track the cuts and we are asking affected groups or individuals to come forward and share their stories.

From a purely macroeconomic standpoint, any government spending is better than none in the midst of a recession as it will boost the economy in the short term. In the long term, however, the best use of government borrowing is to finance investments that will bridge our current economic needs with long-term social and environmental goals. Think investments that leave us with healthier and better educated citizens, that increase long-term productivity and set us up for the “green” economy of the future, while also increasing the quality of life for all people.

It’s here where the current government policy leaves a lot to be desired. We would be better off running higher deficits and making these public investments now, than running smaller deficits and having to pay them off with a less productive economy in the future. Let’s not forget that public dollars can be invested in initiatives that will have long-lasting benefits for said future generations.

According to a new study by UBC’s Human Early Learning Partnership, just under 30% of BC children entering kindergarten are “developmentally vulnerable” (read, not ready to learn), and the resulting depletion of human capital is estimated to cause BC to forgo about 20% of GDP growth over the next 60 years, a value equivalent to investing $401.5 billion today at a rate of 3.5% interest (for more details, see this Vancouver Sun article).

By failing to make public investments now to eliminate child poverty and ensure that our children grow up healthy and have access to good quality education, we are wasting our children’s potential and leaving them with a less productive economy in the future. Yes, making these investments will cost money and increase the government debt, but at this point leaving debt to our children seems far preferable to the alternative of saddling them with the (often very expensive) consequences of our unresolved social and environmental problems.

There is, however, a type of debt that we should not leave to future generations. It’s the debt incurred from hosting lavish parties for ourselves (Olympics, anyone?) or creating wealth by destroying the environment (through subsidizing natural gas extraction, for example).

Increasing government debt in itself is not as large a problem as some of the recent media coverage would suggest, but both BC and Canada’s governments could and should be making better spending choices.

It was surprisingly difficult to find comparable debt estimates for Canadian provinces as provincial budgets accounted for debt slightly differently from one another (some report gross debt, some net debt). Net debt is the difference between total liabilities and total financial assets for each provincial or national government

Source: 2009 Ontario Budget

The picture is similar for Canada as a whole. Out government debt (combining all levels of government) is considerably lower than that of most other OECD countries. We have the lowest debt to GDP ratio in the G-7. The net debt to GDP ratio for Canada was only 27.3% in 2008, compared to 47.5% for the UK, 59% for the US and 97% for Japan (the OECD average is 51%).

Source: OECD Economic Update, June 2009.

With the current record-low interest rates on government borrowing, there hasn’t been a better time for BC or Canada to increase its government debt for the past 20 – 30 years. This is the silver lining of the financial crisis. And while interest rates are going to rise when the economy recovers, they are likely to stabilize at relatively low levels, especially when compared to the high interest rates that Canadian governments had to pay on their debt in the 1980s.

There is clearly no need to panic about the size of the government debt in BC and in Canada. We can afford to support higher debt levels at this time and we can decide how we want to deal with government debt when the economy recovers. In fact, pulling out government stimulus spending too early would have much more damaging effects on our economy than a slightly higher level of debt.

Those who are sounding the alarm about increasing levels of government debt seem to be motivated by ideological aversion to government borrowing more than by actual signs of impending fiscal trouble.

But now that these stimulus packages are starting to show results, the old debt-reduction rhetoric is making a comeback in the media. Harvard economist Kenneth Rogoff warns us from the pages of the Globe that the increasing government borrowing would precipitate a debt crisis, as governments in Canada and around the world struggle to repay their debts, while Preston Manning worries that we would need to recover from the recovery.

To what extent is increasing government debt a problem for BC or Canada as a whole? Let’s take a look at the facts.

Deficit-financing is essentially borrowing, and we all know that borrowed money eventually have to be repaid. But is borrowing always bad? Absolutely not! Most of us would agree that it’s entirely appropriate for businesses to borrow so they can expand production and for individuals to borrow in order to buy a house, for example. This, however, does not mean that borrowing is always good either. What matters is the size of the loan relative to the borrower’s ability to pay and how the money is going to be spent.

When we put the question of increasing government debt in perspective, we see that relative to other jurisdictions, BC and Canada are doing pretty well. Our debt-to-GDP ratios are among the lowest in the OECD. The truth of the matter is that advanced economies can sustain high levels of debt and be ok, as long as they don’t allow their debt-to-GDP ratio to get out of control.

The second key point that is often missed in media commentary is that the recent large increases in government debt are temporary. Governments are borrowing because their revenues have been decimated by the global recession and they need to stimulate their economies. But the current economic storm is not going to last forever. We need to recognize that while the increases in government debt are large, they are temporary. When the economy recovers, deficits will be eliminated and we can begin to develop plans for repaying the recession-time debts.

So when I say that it’s ok for BC to run a $3 billion deficit this year, and that the provincial government did not go far enough in providing an economic stimulus package, I’m not saying that the government should run a $3 billion deficit every year. Over the long run, the budget should be balanced by ensuring that government revenues are sufficient to cover the cost of the services that our government provides (and we need to have a discussion of what these should be). But in the current serious recession, the government needs to temporarily run deficits.

This is because the alternatives are much worse. There are only three ways for a government to avoid deficits at this time: cut spending, increase taxes or sell assets. Large spending cuts during a serious recession will have high social and economic costs, as I explain here. Increasing taxes will put the breaks on the economy at exactly the wrong time. Selling assets is always a short-sighted way of dealing with fiscal problems, and even more so in the current market. Borrowing money to maintain the level of government spending is simply the best option we’ve got in a serious recession and it is the responsible way to go.

We have argued that broad-based spending cuts are unnecessary since BC does not have an expenditure problem, just a short-term revenue problem arising from the recession. Running a large deficit is entirely appropriate and good economics. The last thing BC needs is a government piling on with spending cuts on top of the downturn — this will only worsen the economic picture and throw more people out of work.

To some small extent this message seems to have gotten through – the government will allow the 2009/10 deficit to reach $2.8 billion this year. However, the new budget announced $1.5 billion in “administrative savings” over three years and it’s not clear yet exactly where these will come from (more on this below). The choices tell us that on balance the government’s actions will exacerbate the recession, particularly in smaller communities around the province.

The new economic projections paint a more sober picture of the BC economy in 2009: a 2.9% drop in real GDP; 5% drop in nominal GDP; 2.8% decline in total employment. The average unemployment rate is now forecast at 7.9% for 2009, rising to 8.3% in 2010, and slowly declining to 7.0% in 2013. So the expectation is for “jobless growth” for a few more years. Overall improvements by 2011 are predicated on US and Canadian recoveries.

Based on this gloomy short-term outlook, the new BC Budget figures a deficit of $2.5 billion, or 1.3% of provincial GDP — $2.8 billion or 1.5% of GDP if we add the forecast allowance. Although much ado has been made of the size of the deficit in dollars, as a percent of GDP this is not particularly large by historical standards or even compared to what other provinces are doing. The overall number is consistent with Iglika’s estimate of a status quo deficit on the order of $3.2 to $3.9 billion, because the BC budget banks $750 million from the feds for HST transition (the full $1.6 billion in total transitional funding is spread over three years).

The good news is that most public services have more or less been preserved and there are even some modest increases in some budgets compared to February’s first take. In fact, total expenditures are up $826 million compared to February, although a big chunk of this is increased expenditures for fire fighting (file this one under climate change adaptation).

Some other budget lines had to increase due to the recession – an additional $100 million (compared to Feb) for social assistance, the expenditure area most sensitive to the economy. Compared to 2008/09 this is an increase of 8.8%, and seems too small given that the total caseload is expected to rise by almost 17% (the temporary assistance caseload is up more than that, about 33% higher than 2008/09). Child welfare is also up substantially, by $115 million higher than February. But on the cutting room floor, the budget for community living and related services was pared back by $154 million relative to Feb (though this is still a small net increase in dollars relative to last year’s budget).

Health care sees an overall budget increase of $189 million compared to Feb (and $790 million or 5.2% above 2008/09 levels). In spite of this, there will continue to be challenges in certain areas of the province and certain services. Health authorities identified a $360 million shortfall over the summer and that has led to cuts in services like outreach to seniors.

For K-12 education the picture is much worse, with a cut of $31 million from February — a measly $3 million increase over 2008/09 (on a budget of $5.7 billion). This is going to hurt and already school districts and schools across BC are implementing cuts to staff and increases in class size. For post-secondary education there is an increase of $160 million from February and $177 million, or 3.9%, over 2008/09 –  not great (especially with the prospect of rising enrollment due to the recession) but increases nonetheless.

What is going to sting are a litany of smaller cuts spread across all of the government’s operations, in particular reduced or eliminated grants to NGO service providers and charities, arts and culture groups, and students. All told these cuts are tiny compared to the overall provincial budget, but devastating to the programs themselves. They could easily have been accommodated in only a slightly higher deficit. No detail in terms of specific cuts is provided in the budget itself but overall grants are cut by $354 million, a reduction of 30% from 2008/09. Cuts to grants account for more than half of the identified “savings” from Administrative and Discretionary Spending (Table 1.14). Further “efficiencies” (ie, more cuts) on the order of half a billion dollars will need to be found in 2010/11 and 2011/12, and these are all on top of $1.9 billion in “savings” over three years announced in February’s budget.

The government’s news release speaks a lot about infrastructure spending and stimulus but in fact the budget contains nothing new. Budgeted capital spending is up, although this reflects the addition of funds for the new Port Mann bridge, which were not available back in February. This is a dumb capital expenditure that attempts to build our way out of traffic congestion even though such approaches have never been successful anywhere in the past. In fact, funds for some other capital projects have been scaled back, offsetting somewhat the increase due to the PM.

On the revenue side, total revenues are projected to fall by $1.45 billion in 2009/10 from 2008/09, although this is offset by that $750 million in HST funding from the feds. Revenues are down across the board with the biggest hits on personal income tax revenues (almost $900 million) and natural gas royalties (almost $500 million). The latter is down to $522 million in 2009/10 from $1.3 billion in 2008/09.

A surprise is that Medical Service Plan (MSP) premiums are going up by 6%. This is BC’s most regressive source of revenue (BC is the only province that retains these premiums), one that actually has no linkage to health care spending. This represents about $36 per individual per year, and $72 per family, and there is an enhancement of the premium assistance that will see low-income individuals (under $30,000 income) and families (under $40,000 income) pay less. While these are not huge amounts, this is not what most families with $40,000 of income and up would want after already getting dinged by the HST.

The MSP increase contrasts with an across-the-board income tax reduction in the form of a higher basic personal exemption (to $11,000; this is the threshold at which on begins to pay income tax). Yes, another tax cut I do not need and did not ask for. The cost of the higher exemption is $173 million when fully implemented, compared to a net increase of $107 million from higher MSP. All individuals making more than $11,000 benefit by $72. It hardly makes sense to spread such a thin tax cut across the province when there are pressing needs arising due to the recession.

So why go ahead with this tax cut and MSP increase at the same time? Why table a large deficit but introduce widespread cuts that are going to adversely affect communities across the province? Such is the bizarre world of BC Budget 2009 Take Two.

When B.C. Liberal Premier Gordon Campbell came to office in 2001 he unleashed a top-to-bottom review of all government agencies in an effort to bring finances in order. The result wasn’t pretty. It led to protests of all kinds from any number of public-sector groups affected by the restructuring and cost-slashing that occurred.
Eventually the good times began to roll and the province found itself awash in cash. The economy was booming and Victoria was raking in hundreds of millions in royalties from the oil-and-gas sector alone. It had money for just about everything. And then the global economic meltdown of 2009 had to come along and ruin everything.

That’s a bit of a gloss for what happened along the way.

The worst part of the early 2000s slash-and-burn wasn’t a string of pesky protests. It was the very real and harmful consequences of cuts to public services for people and communities across the province. The CCPA documented those consequences extensively, pointing out that the cuts hit women, rural communities and BC’s most vulnerable citizens (seniors, poor people, low-wage health workers, people living with mental illness, and others) hardest.

At the time, CCPA called the cuts reckless and unnecessary. Reckless because of the pain they would cause. Unnecessary because the government claimed it had to cut spending to eliminate a “structural” deficit, when in fact the deficit was caused by a temporary slowdown in the economy combined with massive income tax cuts. Once the economic situation turned around, BC did indeed find itself in a much stronger fiscal position — but it did not have money for everything. Record high “surprise” surpluses were funneled into debt reduction instead of being used to tackle problems like poverty and homelessness. Nominal expenditures (ie, not adjusted for inflation) in the social service ministries only recouped their pre-cut levels in 2008/09.

Today BC once again faces a cyclical deficit, this time driven by a full-blown recession. As my colleague Iglika Ivanova points out today in the CCPA’s budget reality check, if the government delivers major cuts in Tuesday’s budget, it will only deepen an already painful recession and make it harder for the poor and middle class to weather the storm. Given the to-do in this week’s throne speech about keeping a lid on deficits (weird bare-cupboard-hanging-on-wall-of-deficit imagery and all), it looks like more reckless and unnecessary fiscal policy is coming our way — though it remains to be seen just how far the government will go.

A new report by yours truly, released today by the CCPA, examines the social and economic costs of spending cuts and concludes that in these hard economic times, spending cuts will create far more problems than they solve. This is because government spending has ripple effects throughout the economy, causing a change in output (GDP) that is greater than the actual cut. For the economy as a whole, less money floating around means higher unemployment and lower aggregate income – a drag on the economy at exactly the wrong time. For BC families, spending cuts mean reduced access to public services like libraries, seniors’ care and community health services and reduced supports for the most vulnerable among us. It means that thousands of people would lose their jobs and that’s on top of the recession-driven losses we are going to continue to see for months or even years. Many would be forced into poverty and homelessness.

But it doesn’t have to be that way. British Columbians have been trained to think that government debt is bad and should be avoided at all costs. We continue to be bombarded with dire warnings about the supposed negative effects of running a deficit. Yet, the truth is that it is entirely appropriate for the government to run a large deficit in a serious recession.

At the bare minimum, the deficit needs to be high enough to cover revenue shortfalls arising as a direct result from the recession (the underlying deficit). How big that is would depend on how poorly the provincial economy performs, but our models point to an underlying deficit in the range of $3.2 to $3.9 billion for 2009/10 alone.

The best response to a major recession would go beyond funding the underlying deficit and introduce new spending measures to stimulate the economy and protect incomes and employment.

What British Columbians need from their government in next week’s budget is not a plan to minimize the deficit but bold leadership and a stimulus package that keeps the economy rolling in a way that moves us closer to our social and environmental objectives.

Let me set the record straight: temporary, recession-driven deficits do not threaten the longer-term health of provincial finances.

The deficit that the province now faces is a direct result of the recession; it’s what economists call a cyclical deficit. As economic conditions deteriorate, lower personal incomes and business profits lower tax revenues, while government spending increases to meet the growing need for welfare and other transfers to low-income people, creating a budget deficit. However, these deficits will all but disappear when BC recovers from the recession as tax revenues grow (boosted by higher incomes and profits), while spending on social supports declines (as fewer people need them).

Yes, the government should live within its means over the long term, but there is absolutely no reason to do so every single year. In fact, when “living within its means” requires cutting spending on important programs and services during a recession, it is not just unnecessary but downright harmful. It penalizes the families most affected by the recession, who will have fewer supports to rely on, and it takes money out of the economy precisely at the wrong time.

With the second lowest debt-to-GDP ratio among Canadian provinces, BC is in a good position to run even large deficits over the next few years. The unacceptably high child poverty rate in BC presents a far bigger danger to our children and grandchildren than several years of cyclical deficits ever could.

In their February Budget the Liberals said they were going to have a $500 million deficit this year. Nobody believed them then. Marc Lee called the Budget figures fiction. Writing for the Tyee Will McMartin said:

Another fudge-it budget, you say? It’s worse than that. This fictional fairy-tale might better be described as Toxic Fudge.

BC’s Credit Union Central pooh poohed the Budget projections as wildly optimistic and said the deficit would probably be two or three times higher than the government was admitting.

Today even the Globe and Mail said:

It would seem a given now that the projected budget deficit of $495-million is wholly unrealistic. It could reach $1-billion.

None of this should be wildly surprising. The Budget projected a $200 million increase in income tax revenues, for example, at a time when incomes and the number of people working were falling. It predicted a minimal increase in welfare spending at a time when it is growing so quickly the government stalled release of information about it until after the election.

I’m no economist, but if I can figure this out on the back of an envelope, I’m pretty sure the smart guys in the Finance Ministry have figured it out as well. And I’m pretty sure they wouldn’t have kept it a secret from the Premier and from the Minister of Finance.

So we can expect a financial statement in June expressing surprise, amazement and horror about how badly the financial situation has deteriorated since February.

What happens then? In an April 24 Vaughn Palmer column Premier Campbell said bluntly he would not let the deficit rise. He said:

“I can tell you this: the deficit for 2009-10 will be $495 million maximum.”

That gives him three options. First, he could cut services. Second, he could sell assets. Third, he could intervene legislatively to cut the cost of contracts for public employees. If this sounds familiar, it is because he did all three in his first term of office after manufacturing a huge deficit by the largest tax cut in BC history.

Now he doesn’t need to manufacture a deficit. He can use his promise to keep the deficit to $500 million to drive an ideological agenda. So here’s my prediction. More tax cuts which Campbell will say are necessary to boost the economy. And more cuts to government services for low and middle income people to reduce the deficit.

After all, as Public Eye Online reported:

The premier’s deputy minister Jessica McDonald has stated provincial civil service layoffs, if they do occur, will be under five percent of the workforce. But the Campbell administration is projecting demographic forces will reduce the number of bureaucrats by 30 to 57 percent over the next ten years.

How do you make cuts like that to the public service? Service cuts and privatization.

In the good times, under the Liberals BC became a bad place to be poor. In the bad times it is going to get worse.

BC’s Economic Challenges and the Liberal Platform

By Marc Lee

The BC Liberal platform features many feel-good photos and proud statements taking credit for the province’s recent boom. But read between the lines, and one realizes that after eight years in power, the Liberals have effectively run out of ideas.

The platform fails to offer any vision for the future. The Campbell Liberals made some progress on climate change actions over the past couple years, but the platform offers nothing new. Meanwhile, the Climate Action Secretariat, once residing in the Premier’s office, has been relegated to the Ministry of the Environment, which recently had its budget cut.

Premier Campbell deserves credit for bringing in the carbon tax, plus a variety of other climate measures that represent the low-hanging fruit of greenhouse gas emission reductions. While the carbon tax has its shortcomings, in my view it is a positive first step, and one that carries enormous symbolic value for environmentalists.

Still, the government enters the election without a plan in place to get BC to its legislated 33 per cent reduction in greenhouse gas emissions by 2020. And there are some glaring contradictions between the climate plan and other parts of the Liberals’ platform.

One of those contradictions is the oil and gas industry. Between 2001 and 2006, oil and gas industry emissions surged by far more than the carbon tax will ever reduce come 2020. Recently, Premier Campbell was in the Northeast, promising more new investment in oil and gas extraction, which may make it virtually impossible to reach our targets. And it is not like the oil and gas patch is a huge employer – about 2,200 direct jobs in 2008 – for all that pollution.

Highway expansion and the $3-4 billion Port Mann Super-Bridge also go against the climate-action grain. This expensive mega-project will only push more unsustainable, car-oriented development further up the Fraser Valley. This threatens valuable farmland, and means that congestion will be back within a few years. No jurisdiction in the world has ever built its way out of congestion problems.

The Liberal platform offers no real vision for the economy either, now that the great boom is over. Unemployment rose rapidly through early 2009, and with housing starts down 70%, the worst is yet to come, as construction workers finish their current projects and head straight to the back of the unemployment line.

The current economic collapse is not the fault of the Liberals, but then neither was the boom their creation. BC’s economic fortunes rest on what happens outside our borders, in particular in the export markets of the US and Asia, and in Ottawa, through the Bank of Canada and the federal government.

As cheerleader-in-chief, Premier Campbell may have pumped up the home team’s confidence, but let’s face it, the cheerleaders did not win this game. Like other parts of the world, low interest rates drove a bubble in real estate, leading to a massive expansion of construction activity. And high commodity prices driven by export markets made BC’s resource industries take off.

In February’s budget, the Liberals offered little in the way of stimulus, mostly re-announcing projects already underway or relying on federal stimulus dollars. There is much more that should be done to retrofit our infrastructure to be green – like public transit and energy efficiency upgrades – and to meet long-neglected social needs, like affordable housing, addiction and mental health facilities, or residential health care.

Bad economic times mean that the small deficit projected in the budget will inevitably turn out to be much larger. The Liberal platform promises that BC will “live within its means”, but faced with a $1-2 billion deficit, will a new Liberal government pile on more spending cuts and risk making the economic picture worse, or will it accommodate a larger deficit? What does that mean for the few new promises in the platform, like all-day kindergarten or U-passes for all Vancouver post-secondary students?

In politics, as in business, marketing is everything. The BC Liberals have branded themselves as the party of good economic times, but also the party with the long-term vision to tackle climate change. At a time when families in BC are concerned about the future on both fronts, the Liberals have put forward an unambitious “devil you know” strategy to win re-election.

Even during the good times, not all British Columbians were part of the boom. Poverty rates did not drop in any meaningful way, homelessness doubled, and inequality worsened with each passing year. BC needs a plan, with targets and timelines (just like climate change) to address poverty, especially as the recession deepens its grip.

With a lack of vision and too many contradictions, the platform does not provide any sense of how Campbell the Third will govern.

Like most of the data coming out these days, this economic report card is worse than expected. We should think about hiding it from our parents. For starters, BC’s real GDP fell by 0.3% – not a big drop, mind you, but the first actual fall in provincial GDP since 1982. Most observers now expect declining GDP for 2009, but a drop in 2008 is very much a surprise.

In the 2009 BC Budget, tabled just two months ago, economic growth for 2008 was estimated at 1.0%, slightly lower than growth of 1.3%, the average estimate of the Economic Forecast Council. This tells us yet again that our forecasting has been too biased toward good times, and we are not developing economic plans or fiscal policies with contingencies for bad times (that we hope will not materialize). The esteemed EFC did not even see a recession in 2009 as late as last Fall, and the BC government seems to have been equally delusional.

In 2008, the whole goods-producing part of the economy, i.e. the export sector, basically fall apart. That forestry got killed is probably of no surprise to anyone living in the Interior. Resource-based industries showed downward movement across the board, including a drop of 15% in forestry, agriculture and fishing. I’ve pasted Statscan’s summary below.

BC’s economy is facing a double-whammy: a demand shock as export markets to the US and Asia drop simultaneously (in 1998, it was just the Asian engine that sputtered); and a supply shock arising from the rapid drop of commodity prices, meaning it costs BC more in exports to buy the same amount of imports. On the way up, these forces, strong demand in export markets and rising commodity prices, essentially made a big part of BC’s boom overall, and almost all of it outside Vancouver, Victoria and Kelowna.

The other shoe to drop in 2009 will be the construction sector. In 2008, construction was a source of growth, up more than 4%. With the sharp drop off in new building permits and construction starts, this sector will turn negative in 2009. In employment terms, consider that there were about 235,200 employed in construction at its peak last summer. By March this number had already dropped to 187,800. This pattern will have huge ripple effects throughout the rest of the economy. It bodes ill, for example, for retail trade, which plummeted to 0.6% growth in 2008 (though still positive) from 7% the year before; more unemployment and broader consumer retrenchment will lead to a decent drop in 2009.

All of this reinforces my concerns that the economy is in worse shape than either the NDP or the Liberals are willing to admit on the campaign trail. We need to press our prospective leaders in the next two weeks on what their economic plan is, and how they are going to handle a much larger deficit than what was projected at budget time. Is either prepared to run the types of large deficits that will be needed as the economy worsens (tip: appeals to the Bank of Canada to puchase provincial debt should be made loud and vociferously, as the Bank contemplates a new round of unorthodox monetary policy measures).

This has relevance for another storyline in the GDP statistics: the growth of the public sector. BC’s GDP performance would have been deeper in the red had it not been for 3% growth in education, health care and social services, and almost 4% for public administration. In times like these, when consumer spending, business investment and export markets are down, the only major sector that can step up is government. In 2008, the BC government leaned against those headwinds – but this is in hindsight, the government thought the wind was still at its back.

In 2009, with the storm gaining strength, the lesson is that the government must do more, not less, to avert a major drop in economic output. The meme of BC “living within our means” and the excessive attention paid to keeping the deficit small (and returning to budget balance within two years) are contractionary ideas that will make the economy worse in 2009. That attitude has already settled in in Victoria to some extent, but could get worse. Making large budget cuts to “share the pain” is exactly the wrong thing to do right now, and is the type of move that turns recessions into depression.

Anyway, here is the blurb for BC from the official publication:

The effects of a sharp drop in output of the forestry industry (-18%) rippled through the economy. The decrease was triggered by a slowdown in housing construction in the U.S. combined with a high Canadian dollar in the first half of 2008. Forestry-related manufacturing, including sawmills and paper manufacturing, posted large declines. Affected by these declines, the wholesale industry contracted while transportation and warehousing services remained flat. With economic activity slowing, demand for energy was also affected. The output of utilities was down 4.0%.

Exports fell 6.8% following a small decline in the previous year. The 2008 downturn was largely due to a drop in lumber products.

Output in the mining sector was down as oil and gas extraction and metal ore mining reduced production. However, with prices high, especially for commodities such as coal and natural gas, revenues poured in. This income helped to offset the losses in the forestry sector and corporation profits registered a small gain in 2008.

After a decline in 2007, construction grew again in 2008. Business investment in non-residential structures picked up with projects related to oil and gas extraction and electricity generation. Government capital expenditure increased 0.3% after a cumulative gain of 80% over the previous six years. Housing starts fell off putting a damper on housing construction. Investment in residential construction declined 4.1%.

Growth in personal spending decelerated in 2008 to 2.8%. This was the slowest growth since 2001. Purchases of durable goods fell as sales of cars and trucks declined.

Labour market conditions stayed strong. Labour income increased 5.6%. This pace was well above the national growth rate but below the British Columbia average of the previous five years. Employment advanced 2.1% while the unemployment rate edged up to 4.6%.

The slowdown in the economy was also experienced in the service industries. Only health and public administration grew more quickly than in 2007, benefiting from government expenditures on goods and services, which advanced at a similar rate as in the previous year.

UPDATE: The online version has now been fixed.

Can the NDP deal with B.C.’s economic challenges?

By Marc Lee

In BC’s 2009 election, parties must respond to two fundamental challenges: first, a crashing provincial economy with rapidly rising unemployment; and second, the global climate crisis, which demands that BC dramatically reduce its greenhouse gas emissions.

Rather than pit these objectives against each other, good policy choices should instead link them together: our efforts to boost employment through stimulus packages should be strategic investments that put BC on a sustainable path, not just a return to old patterns of development.

While the NDP platform takes some important steps on both fronts, it does not offer the bold new direction and vision many might expect with global capitalism on its knees. The NDP attacks head-on some of the most egregious and controversial policies of the Liberals, like run-of-the-river power projects and the flawed P3 infrastructure model. But ultimately, the platform is cautious and lands very much in the middle of the road.

This is problematic in that the NDP platform accepts both the culture of fiscal conservatism that has come to dominate Canadian politics (manifested in an over-emphasis on tax cuts and balancing the budget), and an overly rosy view of the state of the economy. It takes as given the Liberals’ February budget, which describes an alternative universe in which unemployment averages 6.2% for 2009, and BC weathers a small storm just in time for the opening ceremonies of the Olympics.

But the provincial unemployment rate hit 7.4% in March, up from 4.3% a year before. Since last summer, 83,000 jobs have been lost. With new housing starts down 70% compared to last year, construction employment will plummet even further as current projects are completed, meaning an unemployment rate that could hit double digits by year-end.

This inevitably means the half-billion dollar budget deficit tabled by the Liberals is a work of fiction. Both parties need to come clean about how they would amend their plans given higher-than-budgeted deficits in the $1-2 billion range.

Moreover, falling consumer spending and business investment mean government must lean even harder against these adverse economic winds. In terms of stimulus, the 2009 budget package will do little to curb rapidly rising unemployment. BC is in an excellent fiscal position, and should err on the side of doing too much, not too little.

The NDP platform adds more stimulus, with a modestly larger deficit and higher capital spending. Together, these provide additional stimulus of 1 to 1.5% of GDP if we count the multiplier effects. How the stimulus is spent is also important, and the NDP’s plan is focused on green infrastructure and social investments.

The NDP platform also takes aim at the climate change file. Its program would cap emissions from large industrial sources starting in 2010, and will harmonize those efforts with a North American cap-and-trade system. They also propose major public transit investments, low-interest loans for building retrofits for energy efficiency, and a royalty on “flaring” in the oil and gas sector (the source of 13% of BC’s GHG emissions).

Unfortunately, most of the attention of climate policy has been on the BC carbon tax, which is neither as horrible as the NDP paints it, nor as potent as advocates make it out to be. Given BC’s fiscal challenges, the NDP would do better by fixing some of the problems with the tax (like ensuring it covers all GHG emissions), using the revenues to fund climate action (rather than borrowing), and shoring up a low-income credit that fails to protect low-income households as of 2010.

The incrementalist approach of the NDP platform also shows on social policy. Even during the recent boom, many British Columbians were left out. The Liberals have overseen the shredding of social assistance, the gutting of social housing construction, and the dubious distinction of BC having the lowest minimum wage in Canada.

The NDP platform would reverse some of this damage. It would raise the minimum wage to $10. It aspires to create 2,400 new social housing units this year, and 1,200 per year after that – a move aimed at a major reduction in homelessness. The NDP have said they would bring in a poverty reduction plan with targets and timelines, but do not say what those targets should be. And the new money for social assistance in their platform is inadequate given this goal and the economic situation.

Now that BC’s housing and commodity booms are over, and the recession is getting worse each week, structural weaknesses in BC’s economy have been revealed that were not cured with a tax cut. BC needs a bold new vision that combines social justice principles with a sustainable economy. By this yardstick, the NDP makes some progress, but by pandering to tax cuts falls short in its ambition.

I’d love to be able to tell you that the government has come to recognize the multitude of problems of this model of providing public infrastructure (which have been described at length in other posts), but I don’t think that’s it. And while it was the financial crisis which made it considerably more difficult and more expensive for the private sector to secure financing for these type of projects, I think it’s stimulus spending that is killing the P3.

You see, two decades of spending cuts in Canada (and many other Western countries such as the UK and Australia) resulted in chronic underinvestment in public infrastructure. At a time when raising taxes or running deficits amounted to political suicide, it’s hardly surprising that governments would be tempted by the idea that they could provide much needed public infrastructure without having to put the money up-front (by using a P3). This, in my view, was the big attraction of the P3 model for governments.

I doubt that high-level bureaucrats were not aware that P3s cost more over the long-run and that they expose taxpayers to higher risk over the lifetime of complex 30 to 40 year-long contracts, but as long as they weren’t prepared to raise taxes or run deficits, what other options did the government have?

Now that it is once again politically acceptable and even desirable to run budget deficits and to spend public funds on infrastructure projects, the model looks like it has outlived its usefulness (at least temporarily). It’s no longer worth the government’s effort or political capital to have to come up with ways to rationalize the cost overruns and project downsizing that have aroused considerable dissatisfaction with the outcomes of many P3s.

But until the public realizes that there is no such thing as free public infrastructure and that we all have to pay for the roads and hospitals we rely on, governments will be tempted to engage in short-sighted deals like P3s, putting short-term considerations ahead of long-term gains.