British Columbia’s economy is set to stall this year, with economists forecasting less than 1-per-cent growth. Government spending in Tuesday’s budget, however, won’t slow accordingly.
Premier David Eby’s government has promised to ramp up capital spending and to boost social services. Health care spending is – as always – on the rise. And the single largest driver of government expenditures – labour costs for the public sector – can go nowhere but up.
In the Throne Speech this month, the Eby government made clear it intends to boost spending in the face of weak economic growth. The budget “will make record new investments to improve public health care and deliver more housing for middle-class families. It will ensure we build the hospitals, schools, child-care centres, roads and public transit that make us stronger. It will introduce new measures to address the cost of living, especially for those most vulnerable.”
On Sunday, the provincial government announced $500-million over four years for BC Ferries aimed at keeping fares down and also to help the service move toward electric ferries.
On Saturday, Mr. Eby announced another round of “affordability credits,” payments that will go to about 85 per cent of British Columbians by April 5 through the Canada Revenue Agency. The credits will amount to up to $164 an adult and $41 a child. Similar funds were extended in January.
Since the New Democratic Party government came to power in 2017, the province has shifted away from more than a decade of fixating on balanced budgets. Even through the pandemic, however, the province has avoided large deficits because of steady economic growth that has outpaced much of the rest of the country.
Growth is not expected to offer much of a buffer this year.
The last public report from the Finance Minister’s Economic Forecast Council, made up of leading economists from across Canada, pegged economic growth at 2.9 per cent in 2022, down from their January, 2022, forecast of 4.2 per cent. For 2023, the forecast has been downgraded to 0.4 per cent from 2.7 per cent, based on expectations of a global economic slowdown.
The province’s population is expected to expand by 2 per cent this year, which should help keep the province out of recession as new residents consume additional services. More residents, however, means per capita economic growth – a measure of changes in economic prosperity – is expected to shrink, notes the Business Council of B.C.’s chief economist, Ken Peacock.
“If this weak growth scenario unfolds, per capita GDP will be basically at the level of what it was seven years ago. So we’re running up on a lost seven years, maybe a lost decade, if things don’t turn around,” Mr. Peacock, a member of the Economic Forecast Council, said in an interview. “Which means less resources in the economy for government, for households.”
The spending pressures can be traced to the priorities identified by Mr. Eby, who became premier in November. He has promised major investments in housing and health care, and relief to British Columbians to offset inflation and the risks associated with anticipated global financial turbulence.
That’s on top of the predictable pattern of government growth. The rise in government spending in B.C. has not faltered since the 1970s. The past six years have marked the steepest incline.
Mr. Peacock said stimulus spending in the early stages of the pandemic is understandable, but he is concerned that the province is building continuing – and compounding – fiscal commitments into the budget that may not be sustainable. “There’s these kind of underlying structural concerns that are going to intensify over the next couple of years.”
The size of the public sector has grown – its growth outpacing almost every other sector of the economy. And because of the richest contract settlements in a generation, government workers’ wage increases will add more than $10-billion to expenditures over three years.
Slower economic growth generally means less government revenue. An exception is federal transfers, which will likely jump because of the recent agreement on health funds, and a new commitment to cost-sharing on some major capital projects.
While B.C. is expecting to collect about $600-million in additional federal funding for health care this year, its spending commitments in this sector can easily swallow that up. A new compensation model for physicians is designed to address the shortage of family doctors, while a new cancer plan announced on Friday lays out the path to tackling growing wait lists for cancer care, with new investments to enhance access to screening and early detection, diagnostic imaging and treatments. As well, the government has built up expectations for a significant spending lift to programs for mental health and addictions.
In addition to building new schools and hospitals, the province has some major new infrastructure projects in the works. This month, the federal government indicated it is willing to contribute to the replacement for the George Massey Tunnel on Highway 99 under the Fraser River, which is currently estimated to cost $4.1-billion, as well as the $9.9-billion Iona Island Wastewater Treatment Plant in Vancouver.
With all of that, the fiscal plan that B.C. Finance Minister Katrine Conroy will present on Tuesday will include some historic spending commitments, and economist Alex Hemingway of the Canadian Centre for Policy Alternatives says that’s fine.
“We have this entrenched fiscal conservatism in B.C. that has led to more than two decades of underinvestment in public services and infrastructure,” he said in an interview. “When you look at government spending as a share of GDP in B.C., that has shrunk substantially over the past two decades.”
Mr. Hemingway is optimistic the province will follow through with investments in housing, and he’s hoping to see tackling poverty emerge as a priority on Tuesday. “One of the simplest and most important metrics to watch for is, do we see a significant increase to social assistance and disability rates in this budget, which everyone recognizes are dismally low and not livable in this province?”
There is room to move without spooking the bond rating agencies into a credit downgrade.
After the last B.C. budget, which forecast a $5.5-billion deficit (which has since morphed into a $5.7-billion surplus), Moody’s Investors Service reaffirmed the province’s triple-A credit rating. It praised B.C.’s “high degree of fiscal flexibility including control over revenues and expenses” and concluded there is room for tax hikes to pay for new spending: “British Columbia’s level of taxation is at the lower end of the Canadian provinces, providing flexibility to raise taxes if necessary while still remaining competitive with other jurisdictions.”