Why BC’s Big Capital Budget May Be Ideal in a Pandemic Economy

Finance Minister Carole James delivered the coming year’s budget and fiscal plan in the legislature 35 days before Dr. Bonnie Henry, B.C.’s public health officer, declared a public health emergency.

Now, amidst the escalating coronavirus crisis, that budget — with its ambitious capital-spending strategy — appears serendipitous, and could do much to help B.C. recover from an expected worldwide recession.

At a time when the global pandemic is forcing tens of thousands of businesses, schools, entertainment venues, restaurants, airports and countless other entities across B.C. to close operations — potentially leaving hundreds of thousands of workers without jobs — the finance minister’s three-year capital strategy is poised to direct billions of dollars towards the construction of long-lasting infrastructure.

To the same end, but in a much-more improvised fashion, James and Premier John Horgan on Monday announced an emergency $5 billion package that will provide income supports and tax relief, along with “direct funding for people, businesses and services,” to stave off an economic collapse.

A month ago, James set capital expenditures for the new fiscal year — which gets underway on April 1 — at a record-breaking $10.5 billion.

That’s a billion-dollar increase on the monies allocated to capital projects in the fiscal year just ending, and a whopping $4 billion more than was spent in the fiscal period before Premier John Horgan and the New Democrats took office in July 2017.

And over the final two years of James’s three-year fiscal plan, capital outlays are projected to rise to $10.6 billion in 2021/22, followed by a jump to $11.5 million in 2022/23.

The total is a massive $32.6 billion over the next three years — this on top of projects currently underway, which include, as James said in her budget address, “building the schools, roads, hospitals, housing, post-secondary facilities and more that our growing province needs.”

As the minister also told assembled MLAs, the New Democrats’ capital-expenditure program already is “supporting 100,000 direct and indirect jobs during construction.”

That number certainly will rise as capital outlays are ramped up in the coming months, and could prompt B.C. to emerge from an economic downturn sooner than might otherwise be the case.

James’s recent budget may prove unique in preparing — unintentionally, but fortuitously — the groundwork for recovery from an economic recession before it occurred.

The old view of government intervention

There has been a remarkable and dramatic shift in public and economic sentiment across the developed world in recent years as to how governments should respond to economic downturns.

When the economy tanks, governments should curtail expenditures and strive to stay out of debt. That was the orthodox prescription for nearly all of the 20th century. At least two, and perhaps three, historic events in British Columbia illustrate this philosophy in action — and how it quite likely delayed economic recovery.

In October 1929, stock markets crashed around the world — notably in New York City — and economic activity nearly everywhere soon collapsed. To use just a single example in B.C., the value of building permits in Vancouver in 1929 added up to $21.6 million; by 1934, that number had dropped to a measly $1.4 million.

Unemployment skyrocketed, although no one — including politicians and economists — had an accurate or continuous way to calculate the extent of total joblessness.

The once-a-decade Canada Census taken in 1931 showed that B.C. had 235,000 “wage earners ten years of age and older” of whom almost half, 111,500, had been unemployed for at least some period of time during the preceding year.

For nearly 88,000 of that latter number it was because they had “no job.”

Revenues collected by the B.C. government — despite the introduction of a raft of new taxes — between 1929/30 and 1933/34 dropped from $26.1 million to $20.2 million.

On the expenditure side of the ledger, the government made little effort to stimulate economic recovery by boosting spending.

Provincial outlays — much of it directed to social services and “relief” — initially rose between 1929/30 and 1931/32, from $26.2 million to $29.2 million, but then dropped precipitously in 1933/34 to just $20.6 million.

That severe decline in spending failed to satisfy the province’s business community, however. Under considerable pressure, then-premier Simon Fraser Tolmie and his Conservative government finally approved the appointment of a five-member panel led by business leader George Kidd to come up with recommendations.

Released to the public in the summer of 1932, the Kidd Report recommended slashing government outlays by, among other things, cutting the number of MLAs nearly in half to 28; reducing the size of cabinet to a mere five ministers; limiting free-public education to children aged 14 years and younger; slashing teachers’ salaries; and abolishing political parties.

Exhausted, demoralized and unpopular after four years of raising taxes and cutting expenditures, the Tolmie government opted to ignore the report.

By November 1933, the Conservatives had all but disappeared and provincial voters elected a new Liberal administration led by Duff Pattullo.

The stagflation experiment

A half-century later, at the end of the 1970s, much of the industrialized world was wrestling with a new economic phenomenon, stagflation — simultaneously-high rates of inflation and unemployment, along with slow economic growth.

The problem was particularly acute in the United States, which over the preceding two decades had fought two concomitant wars — one against poverty and the other an armed conflict in Southeast Asia (which at its peak saw 500,000 American soldiers in Vietnam).

Another important factor was two oil-price shocks, the first in 1973/74 and the second 1979/80, by a newly-emboldened Organization of the Petroleum Exporting Countries, OPEC. Between 1971 and 1980, retail gasoline prices in the U.S. tripled.

Other factors causing stagflation included then-president Richard Nixon taking America off the gold standard in 1973, and a steep increase in the number of women entering the job market.

Whatever the causes, the U.S. year-over-year inflation rate rocketed from one per cent in 1960 to 13.5 per cent in 1979. The annual inflation rate in Canada — as low as 1.3 per cent in the early 1960s — reached a peak of 12.5 per cent in 1981.

Then led by Paul Volcker, the U.S. Federal Reserve addressed the crisis by jacking up federal interest rates, peaking at 20 per cent in 1981. The manoeuvre worked, insofar as U.S. inflation rates fell to just three per cent in the early 1980s, and reached a nadir of 1.1 per cent in 1986. But the economy collapsed.

As inflation fell, unemployment soared. In Canada, the unemployment rate (seasonally adjusted) grew from 3.4 per cent in December 1966, to 7.2 per cent in December 1980, and then to 13 per cent in December 1982.

Austerity and its other names

In the 1930s, the watchword as governments dealt with the Great Depression by cutting expenditures was “retrenchment.” By the 1980s, notably in British Columbia, the mantra had become “restraint.” More recently, “austerity” has been in fashion in the United Kingdom and elsewhere in Europe.

On July 7, 1983, then-finance minister Hugh Curtis — previously a Conservative MLA, but then a Social Credit cabinet minister — rose to deliver his 1983/84 budget speech. Just nine weeks earlier, then-premier Bill Bennett had guided the Socreds to their third consecutive majority government.

“As we know, the economies of the western industrial world have reached a critical stage,” Curtis told the legislature. “The growth and prosperity which came so easily in the 1960s and 1970s have faltered, with the economic crisis of the past two years marking the turning-point.”

Then came a key passage: “All must support restraint in the spending of their tax moneys.”

In total, the word “restraint” was to appear more than two-dozen times through the course of Curtis’s budget speech.

But an interesting point to note is that, unlike Tolmie’s Conservative government in the 1930s, Bennett’s Socred administration in the 1980s did not actually reduce spending. Instead, Curtis’s budget outlined a plan to reduce the rate of growth in expenditures.

“By implementing a comprehensive program of restraint across government,” explained the finance minister, the government intended to “maintain funding of critical social programs, while holding overall expenditure to... a 6.1 percent increase from fiscal year 1981/82.”

To achieve that goal, the Bennett government decided to cut the number of public-sector workers, as well as their compensation. The timeline was aggressive, slashing those ranks by 15 per cent in one year, “with a further reduction planned for 1984/85.”

The aim, said Curtis, was a “leaner, more efficient government.” In other words, as unemployment rates in B.C. were stuck in double-digits, the government determined it would reduce the size of the public service and put thousands of workers on the street.

The last global financial crisis

The fall of 2008 saw a global financial and economic meltdown. Financial institutions around the world — most of whom had purchased worthless securities composed of bundles of dubious mortgages — ended up in financial difficulty when the homeowners could not repay their loans.

In September, Lehman Bros., one of New York’s largest investment banks, collapsed. Earlier, another bank, Bear Stearns, was forced by the government to merge with JP Morgan, and Merrill Lynch was sold to Bank of America.

Countless financial institutions faced liquidation. The worst-case may have been that of the American Insurance Group, which was rescued by the Federal Reserve with a $150 billion bailout. As the financial system stalled across much of the industrialized world, companies once thought invincible — manufacturers, airlines, construction firms — faced ruin.

The U.S. government responded in many ways, but notably through two massive bailouts. First, in October 2008 under then-Republican President George W. Bush, with the Troubled Asset Relief Program, initially valued at $700 billion; and later, under former Democratic President Barack Obama, with the American Recovery and Reinvestment Act of 2009, at a cost of $787 billion.

Politicians of all stripes clearly understood that the government had a role to play in preventing an economic collapse — and then aiding in recovery. How to do that? By injecting cash, liquidity, into the economy.

In British Columbia, then BC Liberal premier Gordon Campbell appeared on a live television broadcast on Oct. 22, 2008 to address the growing crisis.

Earlier in the day, in Nanaimo, Campbell had put forward a five-point plan that included the creation of a new economic advisory council, two economic summits, and a pledge to work with Ottawa.

In his TV address Campbell offered another 10-point plan, which mainly focused on boosting government expenditures. Investments in public infrastructure would be accelerated, he said, personal-income and small-business income taxes would be cut, and school-property tax rates for industry would be rebated.

As well, Campbell pledged to double the commission paid to businesses for collecting the sales tax, and cut ferry fares for two months by one-third. And the legislature, whose fall sitting had been cancelled just days before, would be recalled to attend to urgent business.

So far, so good, but then this clunker: a vow to “rein in avoidable government spending.” So, on one hand Campbell and his Liberals intended to inject additional monies — through tax cuts, rebates and ferry-fare cuts — into the economy, but on the other the government would be cutting budgeted expenditures.

Months later, in February 2009, the BC Liberal government misled citizens by unveiling a budget packed with “toxic fudge.” Finance minister Colin Hansen made the illogical claim that a bevy of revenue sources were set to climb even as joblessness and business shutdowns rocked the province. This he pledged during an election campaign.

After the BC Liberals won reelection to government Hansen’s false claims proved impossible. He had pledged a budgetary deficit of only $495 million. The actual shortfall ballooned to $1.9 billion.

The new thinking about government intervention

Today, as the COVID-19 pandemic roils international economies, B.C. has followed a script increasingly embraced by other governments faced with economic crises. The orthodoxy of balanced budgets appears to have been abandoned by political leaders, esteemed economists and political pundits — not just in B.C. but everywhere.

Indeed, “whatever it takes,” seems to be the new mantra as governments, central banks and businesses around the globe economically battle the pandemic.

The groundwork for such a response in B.C. was laid in the budget delivered in February, with its robust capital-spending strategy, and built upon with the emergency $5 billion pledged this week. If the new orthodoxy proves right, British Columbia could be as well-positioned for economic recovery as any jurisdiction, anywhere.