BC's economic decline based on bad policies

Contact:

Jason Clemens, Director of Fiscal Studies
The Fraser Institute
Telephone: (604) 714-4544
Email: jasonc@fraserinstitute.ca

Joel Emes, Senior Research Economist
The Fraser Institute
Telephone: (604) 714-4546
Email: joele@fraserinstitute.ca

Release Date: 20 March 2001

VANCOUVER, BC —The underlying cause of much of the economic malaise currently facing British Columbia is bad public policy says a new study, Returning British Columbia to Prosperity, released today by The Fraser Institute.

"The last decade stands in sharp contrast to BC’s historical economic performance. Given the province’s natural resources, access to foreign markets, educated workforce, and traditional level of economic performance, the last decade has been ruinous for our economy, and the results are unacceptable to most British Columbians," says Jason Clemens, director of fiscal studies at The Fraser Institute, and co-author of the study.

BC’s Growing Prosperity Gap

British Columbia began the decade with real per capita GDP $367 greater than the national average, and ended the decade $3,471 lower. While Ontario and Alberta experienced tremendous growth in real per capita GDP, 16.7 percent and 26.7 percent respectively, British Columbia languished with a mere 2.1 percent increase in real per capita GDP over the 1990s.

British Columbia’s performance is even worse when disposable income is assessed. The province began the decade with real per capita disposable income $743 above the national average, within close range of both Ontario and Alberta. It ended the decade with real per capita disposable income $768 below the national average and substantially below Ontario’s and Alberta’s levels. Over the last decade, BC actually experienced a contraction of 5.9 percent in real per capita disposable income, while Ontario and Alberta experienced modest growth of 1.0 percent and 3.8 percent, respectively.In other words, average British Columbians had less real disposable income in 2000 than they did in 1990.

"In terms of per capita income, whether measured by GDP or disposable income, British Columbia, over the course of a mere decade, has gone from a position of economic leadership and prosperity in Canada to a position of mediocrity," says Clemens.

"External and internal forces both weigh on the economy. However, since British Columbians cannot influence what happens in the outside world, it makes sense to direct attention to the domestic policy and institutional environment," says Jock Finlayson of the Business Council of BC, writing in the foreword to the study.

Government Spending and Taxes: The Root of the Problems

The root of BC’s economic problems is poor public policy founded on a belief in bigger government. "The road to recovery requires a smaller, more focused government. It requires the provincial government to limit itself to doing those, and only those things, we actually need it to do," says Clemens.

The consistent increases in government spending fail to recognize that many of the problems in the current system, particularly in health care, education, and welfare, have little to do with the amount of money spent and more to do with how we deliver services.

Policy Recommendations

The main prescription for economic recovery in British Columbia is for government to reduce spending and lower taxes. This will mean reductions in core areas of government spending, including health care, education, and social welfare.

"By reforming the way services are delivered, using methods that have already been tested in other jurisdictions, services can be maintained, and indeed improved, while spending is reduced," says Clemens.

The reduction in government spending must be paired with major reductions in personal and business taxes. The reductions should aim to make the province’s tax system more efficient and competitive with competing jurisdictions. Finally, the province should privatize Crown Corporations, with the proceeds earmarked for provincial debt reduction, which in turn would allow for greater tax relief. The following key policy recommendations are drawn from each of the study’s eight policy sections.

1) Fiscal Policy: Government Spending and Taxation:

British Columbia must implement fiscal policies that reduce the proportion of the economy consumed by government.
Reduce the public service and allow the private sector to provide more services.
Implement a legislated program of debt reduction.

Taxation

Introduce a minimum 20 percent across-the-board reduction in personal income tax-rates.
Eliminate the top two statutory tax rates, formerly the high-income surtaxes.
Reduce business income tax rates with a target rate for corporations of 8.00 percent.
Immediately eliminate corporate capital taxes.
Harmonize the Provincial Sales Tax with the GST.
Over the longer-term, the province should implement a broad-based flat tax.

Government spending is financed by tax revenues which are ultimately driven by the performance of the economy. The best way to ensure that government can provide the goods and services we require is to promote economic growth through tax cuts. Alberta is an example of the power of economic growth: The province currently spends 19.8 percent of GDP, which translates into per capita spending of $8426. BC, on the other hand, spends 25.5 percent of GDP but only provides per capita spending of $7911. Promoting economic growth provides more prosperity for individual British Columbians while at the same time enabling government to provide the required programs without taking as much out of the economy.

2) Regulation:

Implement a three-year moratorium on all new regulations in conjunction with a review of existing regulations, and enact a sunset clause for all existing regulations.
Prioritize regulations and apply a cost-benefit analysis with the results made public.
Introduce a regulatory budget along with the annual fiscal budget.

3) Labour Market:

Repeal amendments made over the last decade to the Industrial Relations Act, the Employment Standards Act, and the Fair Wage Act.
Rescind announced increases to the minimum wage and ensure that minimum wages maintain an appropriate relationship with per capita GDP.
Enact right-to-work legislation.

4) Natural Resources—A Focus on the Forestry Sector:

Privatize forests that are currently owned and managed by the Crown.
Repeal the Forest Practices Code and the Forest Renewal Act.
Eliminate the minimum stumpage fee and link stumpage fees to world prices for timber.
Co-ordinate land claim settlements with forest privatization.

"One of the biggest problems with state ownership of forests is that neither government nor private companies logging on Crown lands have any incentive to operate efficiently, to replant, or to harvest prudently," says Clemens.

5) Health Policy:

Intermediate recommendations:

Use private health contractors, both non-profit and for-profit, to deliver health services.
Negotiate a renewed Labour Accord.
Eliminate reference-based pricing.

Long-term recommendations:

Allow and encourage the privatization of health care service delivery.
Adopt a system of medical savings accounts (MSAs).

6) Elementary and Secondary Education:

Introduce flexible regulations and eliminate funding discrimination for Independent schools.
Eliminate catchment areas.
Enact strong charter school legislation.
Re-negotiate collective agreements, specifically for non-teaching staff, so that they reflect market-based compensation and maximize classroom resources.
Implement a broad public voucher system for education.

7) Welfare Policy:

Introduce strong sanctions and immediate work requirements.
Implement time limits for the receipt of benefits.
Tougher sanctions against welfare abusers, including the reduction and/or elimination of benefits, should be introduced along with other reforms.
Promote and encourage experimentation.

"Every province, including British Columbia, should pursue initiatives proven to be successful in the United States. British Columbia must aim to deal quickly, precisely, and compassionately with welfare recipients and their problems," says Clemens

8) Industrial Development and Privatization:

End all direct and indirect subsidies to business.
Immediately designate several Crown corporations as candidates for privatization.
Legislatively require all proceeds from asset sales be used for debt reduction

Given the international and Canadian experience with privatization, several BC Crown corporations should be immediately designated for privatization, including BC Hydro and Power Authority, BC Ferry Corporation, BC Liquor Distribution Branches, Insurance Corporation of BC, and BC Railway Corporation.

"If British Columbia is to return to its traditional position of economic leadership and prosperity then we need to dramatically change the course of public policy in the province. The centrepiece of such reform must be reduced government spending, lower taxes for individuals and business, privatization of Crown Corporations, and fundamental reform of the way in which we deliver core services. Only such a dramatic change in policy will cure the serious economic ills that plague the province," concludes Clemens.

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver, with offices in Calgary and Toronto.

For further information contact:
Suzanne Walters, Director of Communications,
The Fraser Institute
(604) 714-4582
Email: suzannew@fraserinstitute.ca