Uncertainty is looming over province’s economy

Last spring, B.C. went through one of the most tumultuous elections in years. First, there was the political uncertainty that resulted from the hung legislature as no one political party received the majority of seats. Second, there was the uncertainty regarding who the Greens would support.

Finally, and more crucially from an investment perspective, there was policy uncertainty resulting from the NDP/Green alliance. The commitments to increase personal income, business and carbon tax rates, stop the Kinder Morgan pipeline, and raise the minimum wage to $15 per hour all introduce uncertainty for the province’s economic future and increase uncertainty for investment.

This is not an abstract problem. Research has shown that policy uncertainty can drive down business investment by between six and 10.5 per cent.

To see how B.C. uncertainty was impacted by the election, we created a proxy measure using newspaper reporting of the word “uncertain” in the province from 2009 to the present, inspired by the seminal work on American economic policy uncertainty developed by economists Scott Baker, Nick Bloom and Steven Davis.

The B.C. analysis illustrates that uncertainty is typically higher around election time.

While previous provincial elections also led to spikes in the number of stories about “uncertainty,” the 2017 election prompted more than double the number of such stories compared to Christy Clark’s majority electoral win in 2013.

In fact, in July 2013 and July 2009 following each year’s provincial election, the number of stories that included “uncertainty” had declined to just three. Last month, “uncertainty” appeared in 12 newspaper stories in the province.

The issues most associated with uncertainty following the recent election — apart from the actual election results and who will form government, which accounted for 31 per cent of news stories — were energy and pipeline policies (24 per cent), taxation (17 per cent) and the economy (15 per cent).

Another element of the NDP and Green party association that could lead to greater uncertainty in future elections, and the economic policy environment more generally, is the commitment to change the electoral system to proportional representation. While such electoral systems are purported to be more democratic, they also result in more political parties and more minority governments. The experience in other countries with proportional representation systems is that those minority governments form coalitions with minority parties. In parliamentary systems, coalition governments are often shorter in duration and are higher spenders and debt accumulators than single-party governments.

The reason for higher government spending is that coalition partners, knowing their time in office is limited, will increase spending to improve their electoral fortunes. Moreover, precisely because the government’s tenure is short, the burden of paying for the higher spending can be pushed on to future governments.

Of course, when governments incur debt, this leaves businesses and households uncertain about future tax hikes, and that uncertainty impedes investment and entrepreneurship today.

Any government can increase economic policy uncertainty. In B.C., the previous majority Liberal government initiated periods of uncertainty by implementing certain policies including, for example, the foreign homebuyers’ tax.

There are also numerous examples from other provinces where majority governments have increased government debt or created an uncertain investment climate. However, moving toward an electoral system, that by design encourages minority governments, is a recipe for persistent policy uncertainty because minority governments will have greater negative impacts on business investment than majority governments.

Given the current composition of political parties in B.C., if the NDP/Green commitment to adopt proportional representation goes ahead, we can expect to see more coalition governments and more political and policy uncertainty in the future.

Lydia Miljan is an associate professor of political science at the University of Windsor and a senior fellow of the Fraser Institute.