Wheat from the Chaff

The Neo-Liberal Agenda: The Effects in BC, Part 1

I've talked at length about the failure of the neo-liberal agenda to increase productivity and high-quality employment, particularly in the Canadian context. But do these lack of economic benefits pertain to BC?

The Fraser Institute certainly doesn't think so. In a recent editorial puff piece in the Vancouver Sun - surprise, surprise - two writers from the F.I. extol the virtues of the BC Liberal government:

... Shortly after coming to power in June 2001, Campbell implemented major tax cuts on both personal and corporate income and scheduled additional cuts thereafter. Specifically, in his first budget (2001), Premier Campbell enacted a 25-per-cent across-the-board reduction in personal income tax rates, followed by more cuts in 2007 and 2008. The result was a significant improvement in incentives for British Columbians to work, save, invest, and be entrepreneurial.

His 2001 budget also reduced the general corporate income tax rate to 13.5 per cent from 16.5 per cent (effective in 2002); later reductions dropped the rate further to 10.5 per cent in 2010. Thanks to these and other business tax cuts (i. e. elimination of the corporate capital tax) B.C. now has a more competitive business tax regime.

Controlling government spending has also allowed Campbell to better manage government debt. From 2001-02 to 2009-10, Campbell's government generally balanced the books and on average recorded a small surplus (0.13 per cent of GDP). Over the same period, it reduced B.C.'s net debt to 15.7 per cent of GDP in 2009-10 from 18.5 per cent of GDP in 2001-02....

I won't go into the massive capital infrastructure costs that are not part of the Fraser Institute's accounting of our provincial debt. The real point is the drivel about "a more competitive business tax regime". In a truly competitive economy, profits and tax savings are supposed to be reinvested to make a business more efficient and more cost-effective. That's how you succeed in a competitive environment. But the problem with the Fraser Institute argument is - surprise, surprise - it's not happening.

In their recent "2010 BC Check-Up", the Institute of Chartered Accountants of British Columbia - no friends of progressive policy - offer very different conclusions about BC's "Golden Decade". To be sure, they do agree that productivity is important:

Improving productivity should be the cornerstone of any provincial economic action plan, as productive and efficient businesses have additional capital to reinvest in both their workforce and new machinery and equipment. A productive economy allows BC’s businesses to better compete internationally and will drive the province’s long-term economic health.

Unfortunately, BC isn't doing particularly well in terms of productivity:

Despite the infusion of investment and human capital in the past five years, BC’s labour force productivity stagnated. All of Canada suffers from a labour productivity gap with the US, but BC’s productivity has remained below the national average for many years. To a large degree, poor productivity explains the lower real wage in BC, as a less productive workforce affects profit margins and decreases the amount of capital that can be reinvested. This deterrent to investment, over the long-term, could erode BC’s ability to compete against the US. One of the more notable results in this year’s BC Check-Up was BC’s productivity gain of 2.1%, the best result in our comparison. However, to some extent, this gain was the result of rationalization in the forest industry, which means that BC’s turnaround in this critical indicator was linked to the loss of many jobs in a vulnerable sector, rather than increased investment in machinery and equipment and human capital.

Labour productivity rests not only on capital investment, but also the quality of the labour force itself. BC’s labour force educational attainment is still lower (63.1%) when compared to Alberta, Ontario, and Canada as a whole (64.3%, 68%, and 66.4% respectively); it also grew slowly during the past five years (3.8% compared to the national average growth rate of 4.7%). And employment in the sciences declined in 2009, by 0.6 ppt, as layoffs occurred across many sectors where these skills are needed.

This lack of productivity helps explain why BC has the highest child poverty rate in the country, and some of the worst real wages of any province. Indeed, the effects are quite staggering:

In 2009, BC’s real hourly wage was $23.89, compared to $27.24 in Alberta, and $24.48 in Ontario. Labour compensation per worker was even more skewed, at $44,568 in BC, compared to $64,516 in Alberta and $48,612 across Canada. Finally, the female/male wage ratio in BC is lower than it was five years ago (from 0.87 in 2004 to 0.84 in 2009), in stark contrast to all other comparison jurisdictions, where it has generally risen.

The only question remaining is this: After a decade of massive tax cuts for businesses, what have they done with all that money?