Selina Robinson, B.C.’s Finance Minister, is preparing her Feb. 22 budget to accommodate astronomical demands for spending.
The natural disasters of 2021 – floods, mudslides and wildfires – have left the province with a stack of relief and repair bills, as well as an imperative to rebuild infrastructure to a higher standard that can accommodate the changing climate. The twin health emergencies of the pandemic and the rising toll of toxic opioids are straining the health care system. And, an acute skills shortage will fuel demands for wage hikes in the public sector.
The pressures on spending are clear, but there is uncertainty on the revenue side.
The first financial warning signal came a little more than 24 hours after the Sumas River dike in Abbotsford, B.C., failed, flooding homes and farms. The same storm system that overwhelmed the dike caused flooding and mudslides across southern B.C.
“The extreme flooding in British Columbia, highlighting a year of elevated environmental risks faced by the province from floods and wildfires, is credit-negative because of higher anticipated spending by the province to repair damaged critical infrastructure and provide relief,” Adam Hardi, vice-president of Moody’s Investors Service, said in a Nov. 17 statement. All the downsides of the pandemic didn’t rattle bond rating agencies like this has.
Ms. Robinson met with her economic forecast council in early December, when the impact of November’s flood disasters was still being processed.
“Economic activity is not going to be close to normal,” Douglas Porter, chief economist for Bank of Montreal, said in an interview after that session. At that time, he was the only economist to revise his forecast for 2021, but others are expected to adjust their expectations in the coming weeks.
This year’s deadly storms and wildfires have taken a toll on individuals, communities, businesses and the provincial economy as a whole. However, the rebuilding that is now required does, in purely economic terms, have an upside.
B.C.’s economy has weathered the pandemic largely because major construction projects worth tens of billions of dollars have carried on throughout the pandemic – the Site C dam, the Trans Mountain pipeline expansion and the LNG Canada project. In 2009, the Business Council of B.C. estimated this trio of capital investments accounted for about two-thirds of all economic growth in the province. But these projects will all wrap up in two or three years, and there is nothing on that scale to replace them.
So even as this year’s wildfires and floods have left billions of dollars in damages in their wake, they won’t add up to a lasting blow to the economy, Mr. Porter said. The reconstruction process is going to be big enough to provide a measurable lift.
“We’ve revised down for 2021. But almost tick for tick, we’ve revised it up for 2022,” Mr. Porter said. “We see British Columbia as having the best long-term growth potential in the country.”
Ken Peacock, chief economist for the Business Council of B.C., agrees the impact of the flooding is so large that it will leave a mark on the economy this year. He also believes the province can absorb the costs, albeit at inflated costs.
“It’s clearly going to impact 2021 economic activity – the closing of the highways, the loss of agricultural animals and crops. It’s absolutely massive. Houses and businesses are totally destroyed and wiped out,” he said in an interview. “But then when you step back, the size of the provincial economy is $260-billion. So even if it’s multiple billions of dollars to rebuild it, it’s relatively small in the context of the whole provincial economy.”
The challenge right now is finding the resources to rebuild in the near term.
“My sense is that the rebuilding is such a high priority, that government will just have to pay higher costs because they will have to take resources from somewhere else,” he said. “Cost escalation was evident prior to the pandemic; arguably, it’s going to be worse now. It’s a question of capacity, with all these other large projects are still going on in the construction industry.”
And if inflation is a problem in the construction sector, just wait until the province sits down at the bargaining table with its public-sector unions.
The biggest item in any budget year is wages – compensation for government and provincial public-sector employees consumes more than half of the province’s budget, and almost all public-sector union contracts expire in March, 2022. A 1-per-cent increase in compensation equals $370-million. The skills shortage that is evident in construction, the tech sector and health care is going to make this round of bargaining a tough one for the province.
Ms. Robinson hasn’t declared her theme for the next budget yet, but it is going to be big.
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Justine Hunter