What are the top fiscal landmines that B.C. could hit in 2012 and what can the Liberals do to avoid them?

In 2011, most economic forecasters began the year rather optimistic. British Columbia had rebounded nicely from the 2009 recession and saw its economy grow at 3.0% in 2010, robust growth most forecasters thought would continue. Indeed, the BC government’s Economic Forecast Council, a group of private-sector economists, predicted growth of 2.7% in 2011 and 3.0% for 2012.

By mid-2011, however, the US economy was on shaky ground, the European government debt crisis was spreading and there was increased anticipation that demand for BC’s exports was weakening. As a result, the rather rosy projections for BC and Canada were significantly revised downward throughout the year.

As the BC government begins to construct its 2012 budget, forecasters are indicating there will be little to celebrate economically this year. And while we can all hope the forecasters are wrong yet again, there are a host of external factors that could negatively impact BC’s economy.

The short term outlook for the US economy looks weak and policy uncertainty in Washington is making matters worse. In addition, increasing signs of weaker growth in Asia (specifically China) and elsewhere suggest that commodity prices and exports will decrease. This would really harm BC. Finally, some economists have warned about a slumping BC housing market.

These external factors are beyond the control of the BC government. But what the  Liberals can do is avoid interventionist attempts to “create jobs” and/or stimulate the economy — especially those that rely on picking businesses and industries to receive taxpayer support. Instead, the best way to mitigate the external risks is to ensure that BC is the most investment-friendly jurisdiction in Canada.

To do so, the government should create an economic environment that encourages all individuals and businesses to succeed.

First, the government must ensure provincial finances are prudently managed. Of particular concern, the government is forecasting a deficit for the next three years and has seen its debt increase to 17% (as a share of the economy) from 12% in 2007/08. Continued deficits and increased government debt are a significant drag on the economy and an unfair burden on the next generation of BC families.

The BC government should restrain spending more aggressively to balance the budget more quickly. This can be done by dealing with BC’s sky rocketing health care expenditures which continue to consume a larger portion of government resources. By 2013-14, health care will account for nearly 46% of the government’s program spending, up from 37% in 2001.

By reforming the way government services are delivered, the Liberals could save money on health care without negatively impacting quality; they only need to implement policies that are common in Europe.

If health-care spending is not restrained, the government will be unable to finance other initiatives that would improve BC’s investment climate including much needed tax relief.

While BC has improved its business and personal income tax system over the past decade, restoring the PST will strike a blow to the  investment climate.  Lower corporate income taxes and/or a complete sales tax exemption on machinery, equipment and technology used in the production process would mitigate the damage.

Moreover, BC should institute a single flat tax rate on personal income (like Alberta) to help attract and retain professional and skilled workers, and encourage investment and entrepreneurship.

Cutting unnecessary red tape should also be a priority. BC suffers from too much government regulation, which decreases industrial innovation, delays product development and adoption, and stifles entrepreneurship. One particular area of red tape that threatens BC’s investment climate is recent environmental regulation.

With the risk of external factors negatively impacting the economy, it‘s critical for the BC government to focus on pro-economic growth policies. Start with improving the investment climate.