Preparing for the BC Budget

I have an oped in today’s Vancouver Sun, juxtaposed against the Fraser Institute, unfortunately. I’d like to think mine is much more timely and appropriate given the current economic situation (I’ll get to theirs in a subsequent post).

BC Needs an Action Plan to Fight a Nasty Recession

On February 17 the BC government will table the province’s first recession budget in a generation. The big question for the budget is no longer whether a deficit is in order, but how large that deficit should be, and what a meaningful stimulus package looks like.

With grim economic numbers piling up, the danger is in the government doing too little. BC’s economic expansion since 2002 was driven in large part by high commodity prices, a housing boom, and strong US and Asian demand for our exports. In 2009, these dynamics have shifted into reverse, and all major economic indicators are pointing in the wrong direction.

Unemployment trends are particularly worrisome. In January, the ranks of the unemployed swelled by 35,000, an increase of 50% compared to last January. Employment in residential construction will be hit hard in 2009, with BC housing starts this year projected to be almost half of levels in 2007 and 2008. That drop translates into about 3.5% of BC’s GDP, a huge hit to the provincial economy that will further drive up the unemployment rate.

Many private sector forecasters continue to hold out hope that BC will avert a recession. But the latest data suggest that we should prepare for a much rougher ride. Heavily indebted households are pulling back on consumer spending and businesses are reining in their investments. This leaves government as the only sector of the economy that can fill the gap to avert a deep recession.

Last month’s federal budget is already being criticized as too timid relative to the challenges we face. It tabled a stimulus package of just over 1 per cent of GDP, about half as much as what the IMF and OECD have been calling for. And while there are some worthwhile infrastructure projects on the list, the federal budget did nothing to shore up unemployment insurance and target assistance to vulnerable Canadians.

This means BC will have to do more of the heavy lifting itself. A recession will quickly push the budget balance close to a $1 billion deficit – and if the recession is as deep as the recent data suggest, deficits could easily be in the $2 to $3 billion range.

And that is just the “status quo” or cyclical deficit that arises from the drop in revenues due to a recession and the upwards pressures on expenditures (notably, social assistance). A stimulus package, as recommended by most economists, would require an even larger increase in BC’s debt. The good news is that BC is well positioned to run deficits due to its excellent fiscal health.

The key point in the period ahead is to get money into the hands of those who will spend it quickly. Broad-based tax cuts are a poor source of stimulus compared to government spending. In uncertain times, the tendency of most tax-cut recipients will be to save rather than spend – and much of what is spent will be on imports rather than boosting local economies.

The recession will mark the first real test of BCs social assistance program since cuts were made in the mid-1990s to early 2000s. The government should commit to immediately increasing income assistance and disability benefit rates by 50 per cent and indexing them to inflation. In addition, income supports must be accessible to those in need by removing the arbitrary barriers that discourage, delay, and deny financial help to people in need.

Infrastructure spending will inevitably be a major part of the BC response. But such spending should be green and meet social needs. A major campaign of new capital spending offers the opportunity to green BC’s infrastructure, from public transit expansion to retrofits of homes. Working with new federal money, BC should ensure that approved projects first pass through a green filter.

Expanding BC’s social infrastructure should also be on the table, including early learning and child care, and educational investments given that large numbers of young people will go back to school in a downturn. Social housing and residential care facilities are other key areas where workers can continue to be employed in construction.

Finally, preparations for the upcoming 2010 Winter Games will not prevent a recession. These projects are already nearing completion, and in total dollars are relatively small in the context of BC’s almost $200 billion economy.

Budgets are about the choices we make as a society. In the face of a recession that will have negative impacts for communities and families across the province, we need a government committed to action, and to ensuring that no British Columbians are left out in the cold.