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Can a ‘conventional fiscal policy approach’ and ‘tax cuts’ solve the strategic issues facing British Columbia in today’s open economic conditions?

Previous BC governments failed to detect strategic issues and problems in the allocation and pricing mechanism that regulates the liquidity and money flow in our economy. That includes issues relating to federal tax transfer and intervention in the regional and local economy. Subsequently, they also failed to intervene appropriately before those issues caused adversity and irreparable harm to the community.

In good democratic order, the voters reacted and gave the BC Liberals an explicit mandate to reorganize the government’s policies and institutions and to solve the issues that hamper investment in economic production and jobs.

Canada and BC’s economy is not a planned, but a democratic governed mixed economy and what is significant today - an open mixed economy with unrestricted movement of investment and liquidity. For the members of society that make up the economy, tax base, quality of life, a good ecology and political stability, ultimately depend on private investment in sustainable economic production. Therefore, the question for BC is: will the new government’s economic and social policy stimulate investment and create the liquidity that BC businesses need in order to create jobs and distribute wealth in the community via better paid jobs?

In our mixed economy, government’s task is to collect tax to provide services the private sector is unable to provide, and such services that society in good democratic order has decided should be excluded from the private sector and the pricing mechanism – such as healthcare etc. Our constitution states that government is committed to: "…furthering economic development to reduce disparity in opportunities."

Fiscal policies, budget and tax increases and cuts are the government’s tools to smooth fluctuations in the economy and to prevent or solve overheating or recessions. They are also strong political campaign instruments.

Although difficult for the voters to assess, it is appealing to believe that tax cuts and fiscal measures will be sufficient to encourage investors at home and abroad to inject investment in economic production in BC.

Tax reductions in other provinces and countries are often credited or blamed for social and economic impact that in reality have different causes.

In BC, decades of old problems were left unsolved and allowed to become acute. It is reasonable to say that previous governments did not provide the service the pricing mechanism and private sector failed to provide. The government failed to analyze and detect the problems in industry, including issues in the government’s own policies. In sectors such as forests and healthcare, both industry and government seems to have been unaware of the real depth of the market, financial, organizational and ecological issues facing the industry and the community. Tax transfer programs simply increased disparities in opportunities.

This perpetuated a system that during the good times failed to encourage long-term investment, adding value, and using fewer resources; and during the bad times, it stimulated industry and members of the community to expect government assistance and bailouts.

Better and more appropriate use of tax and tax transfers is as important as tax cuts. There is often too much emphasis on tax cuts and too little on the uses of tax and what government’s role ought to be.

The government can only prevent problems by prudent monitoring of the allocation mechanism and proper intervention before problems occur. That requires not only recognizing the problems, but also identifying the underlying causes.

We need to ask: a) has government properly identified the issues? b) do they know the underlying causes? c) will the government fiscal policy generate the investment and liquidity needed to stimulate economic production in business and jobs.

Up to the middle of the eighties, traditional fiscal and tax measures were sufficient. The problem is, since the eighties, the economy has shifted from a more closed and resource driven, to today’s knowledge driven economy, with more open economic and market conditions.

Free and unrestricted movement of investment and liquidity and e-communication has removed any connection between where people live and where they invest and deposit their money. Tax multipliers and consumer and investor propensities have changed, and subsequently so does the effect of budget and tax cuts.

This is changing the economic behavior and socio-psychology in the community. Intervention programs and fiscal measures that worked and could stimulate economic production in economic closed conditions are not as effective in today’s open conditions. Investment and liquidity is flowing into the major equity market and little is ending up and invested back in economic production in British Columbia, particularly to Small and Midsize enterprises.

It is OISD’s analysis, that in BC’s case it would be wise to have a plan B that considers that conventional tax cuts, fiscal measures and the private sector alone will not fix the problems and stimulate investment.

In order to stimulate investment from investors at home and abroad, BC will need to solve a series of problems in the allocation and pricing mechanism. It will also be crucial to stimulate more lateral investment and liquidity flow for BC.

That will require both BC and Federal government intervention that meets the standard for government intervention in a knowledge driven open economy. The more open the economy is, the more important it becomes that government meet its monitoring and intervening role in the economy. Never before has good government been more important for BC.

The methods of distributing wealth by solving the allocation problems that hamper economic production, is far more efficient and advantageous for society, than first collecting and redistributing tax in the form of individual and corporate welfare. Solving the allocation problem that hampers private investment in viable small and midsize businesses that can distribute wealth via well-paid jobs is where our new governments efforts should be focused.

Ultimately, in our economic system, social satisfaction, the tax base, a good ecology and political stability depends on the issues that hamper private investment in economic production from investors abroad and at home, being solved.

The BC government needs to review its role in the economy and its accountability to society and to take steps to adapt to open economic conditions. That will have to include a tax overhaul.

That will also require what level of government has the mandate and responsibility to analyze, detect and address issues in industrial sectors on a national, provincial or local level. Which level of government has the mandate to identify and address issues in the regional and local economy – such as in Prince Rupert and Western Star in Kelowna - before the problems become acute.

Our municipal government has an administrative function that is limited to infrastructure planning. It is significant that local governments have no economic, social and ecological mandate and responsibility. That is a problem because it encourage local focus on land development and tax transfers rather than on investment in economic production and jobs.

The powers of economic development and responsibility to allocate resources to a sector of the economy or a specific problem area are shared between the federal and provincial governments, as our constitution states: government is committed to … " furthering economic development to reduce disparity in opportunities".

Downloading senior government responsibilities to Municipalities will require fundamental changes to the taxation system and the local governments structure.

As Albert Einstein said, "The significant problems we face cannot be solved at the same level of thinking we were at when we created them." British Columbia is facing fundamental problems in the allocation mechanism that will require new thinking to solve them.

OISD is concerned that our new government must be aware of the extent of the allocation problems, and the risk that the fiscal measures and tax cuts may not solve the underlying issues BC face.

OISD  September 2001