April 2001
Returning British Columbia to Prosperity
by Jason Clemens & Joel Emes
Historically, British Columbia has enjoyed a high level of prosperity expressed in high incomes, low unemployment, strong investment, and a wealth of opportunities. But in one brief decade, the provincial economy has been transformed from a strong, vibrant entity into one characterized by weakness and mediocrity. Only a radical change in government policy will return British Columbia to its traditional place of economic prosperity.
British Columbia started the 1990s with real per capita GDP $367 above the national average, and ended it $3,471 below. For much of the decade BC trailed every province in the growth of personal disposable income. The province's unemployment rate is above the national average and nearly 50 percent higher than Alberta's. BC's investment record has been an unmitigated disaster—real net business investment actually shrank by 13.3 percent between 1991 and 1999. The 1990s was a decade of lost economic opportunities with few, if any, bright spots.
There is no shortage of external excuses for BC's poor economic performance. The most common is low commodity prices and Asia's economic slowdown. Some people even attempt to explain the problems of the last decade as the result of a lack of government intervention. BC's first step to recovery is accurately diagnosing the main cause of its current economic problems: poor government policy. This self-inflicted decline is rooted in three general areas: spending, taxation, and regulation.
Government in British Columbia has grown unwieldy over the last decade to the point where it impedes economic growth by frustrating private initiative. BC not only needs the size of government to shrink, but also needs government program delivery to be fundamentally restructured.
In 1999/00, the BC government accounted for 28.3 percent of GDP, while Ontario and Alberta accounted for 22.8 percent and 21.2 percent, respectively. In other words, the size of government in BC was at least one-quarter larger than in either of the other two "have" provinces.
British Columbia must undertake substantial spending reductions to close this gap. Such reductions will require spending cuts in core programs including health care, education, and welfare. This need not result in a lower quality of service. Perhaps the greatest fallacy plaguing policy discussions is that the problems facing government programs are due to underfunding. The reality is that much of the difficulties are institutional. That is, the problems are grounded in how programs are provided, not how much is spent on them.
First and foremost, the government must move away from concerning itself with processes and providers, and instead focus on results. For instance, if for-profit or non-profit organizations can achieve better results at more reasonable costs, then we should use them to the maximum extent possible in all areas, including health care, education, and welfare. Government must encourage greater program experimentation by providing more flexibility at the local and regional levels. Such reforms will yield not only improved program service but also cost savings.
Fundamentally reforming and reducing government spending will allow for meaningful tax reduction. Measures required to make BC's tax system more competitive include: eliminating the top two personal income tax brackets, a minimum 20 percent across-the-board personal income tax rate reduction, elimination of all corporate capital taxes, and a multi-year plan to reduce corporate income tax rates to 8 percent in order to match those planned in Alberta and Ontario. In addition, the provincial government should integrate the provincial sales tax with the GST. These changes will encourage investment and entrepreneurialism, and promote higher rates of economic growth.
Regulatory reform is also crucial. The damaging regulations enacted over the last decade explain many of the problems in the mining and forestry sectors as well as in the labour market. Regulations must be implemented based on a thorough (and public) cost/benefit analysis to ensure that they provide a net benefit to society. In addition, regulations should be prioritized, focused on results rather than process, and enacted with mandatory sunset clauses to ensure regular evaluations.
An additional reform that could yield savings is the privatization of many of British Columbia's Crown Corporations. The sale of these profitable entities would provide government with one-time revenues to reduce the province's debt. Reducing debt would also reduce debt-servicing costs and allow for greater tax cuts. Further, the Crown Corporations that were privatized would begin to pay corporate income tax, and thus would continue to contribute to the government's coffers.
In order for British Columbia to return to its traditional position of prosperity, its policies must change radically. It must turn away from many of its current policies with as much force as it turned toward them at the beginning of the last decade. The recommendations outlined above, if followed, will put the province on a path towards efficient government. They will maximize economic growth and prosperity while maintaining and improving the essential services we as a society want government to provide.
[This article is a summary of the recent publication Returning British Columbia to Prosperity by the same authors.]
Jason Clemens (jasonc@fraserinstitute.ca) is the Director of Fiscal Studies at The Fraser Institute. He has a Masters Degree in Business Administration from the University of Windsor.
Joel Emes (joele@fraserinstitute.ca) is Senior Research Economist at The Fraser Institute. He has an M.A. in Economics from Simon Fraser University.
A version of this article first appeared in the Vancouver Sunon March 21, 2001.
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