In this podcast episode, CPABC’s economist Aaron Aerts speaks with Vivian Tse, CPABC’s director of communications, about CPABC's BC Check-Up 2023: Invest report, including slowing inflation, BC building investment, and BC’s economic outlook. Part of our Coffee Chats with CPABC podcast series.
Last year, rapid inflation resulted in the fastest interest rate increase in a generation. CPABC's BC Check-Up 2023: Invest report found that while investment in the province remained resilient in 2022, there are signs high interest rates are slowing capital expenditures and weakening our economic outlook.
One example is a sustained decline in building permits, a leading indicator for construction activity. The total value of building permits issued by municipalities across the province was $1.27 billion in March 2023 (adjusted for inflation), a 16.6 per cent decline compared to the $1.53 billion issued in March 2022 when interest rates first started to rise.
This decline in building investment will have detrimental effects on our economy. It will slow housing growth, worsening the already significant affordability challenge in the province. It will also lower the amount of new commercial/industrial space, meaning less services for residents and businesses, and fewer potential jobs. Finally, it will weaken the economy through reduced construction activity and infrastructure.
Thankfully, there is a significant amount of capital invested into major projects across the province. In Q4 2022, there was $388.3 billion allocated to major projects. In addition, BC Budget 2023 allocated $48.5 billion to projects over the next three years. These projects will improve access to natural resources and create more housing, transportation infrastructure, hospitals, and schools.
However, the budget also forecasts that operational spending will grow rapidly even as revenues fall, resulting in the fiscal balance shifting from a surplus to a deficit in each of the next three years. This, in conjunction with significant capital investment, is forecasted to grow BC’s taxpayer supported debt-to-GDP from 16.4% in 2022-23 to 23.0% in 2025-26, representing an increase of $35.7 billion in debt.
Growing debt limits our ability to respond to future economic downturns and will result in more government resources being directed to interest payments rather than programs to support British Columbians and our economy. To help control debt and enable fiscal flexibility, it is important that the province create a concrete plan to return to surplus.
Further, while the budget allocates significant resources to important priorities such as healthcare and housing, a very limited amount is allocated to directly improve our economic outlook. Economic growth is ultimately what funds the many important social services British Columbians rely on, and policies that support productivity and the economy should also be prioritized.
One issue that has consistently been identified as an investment deterrent is the long regulatory delays and considerable uncertainty in the process. To attract more housing and other developments, the province should look at streamlining the regulatory approval process at both the municipal and provincial levels. In addition, to help attract more business investment, the province should look at policies that will increase confidence in a predictable outcome and that improve B.C.’s competitiveness, such as by reducing the PST paid on business inputs.
Lori Mathison, FCPA, FCGA, LLB is the president and CEO for CPABC.
In Other News
While inflation remains well above the Bank of Canada’s 2% target, it continues to slow both provincially and nationally. In March 2023, overall prices in BC rose by 4.7% in BC and 4.3% in Canada compared to March 2022, the slowest rate in BC since February 2022. In comparison, BC’s annual inflation rate was 6.2% to start this year and peaked at 8.1% last May.
According to BC Check-Up: Invest, an annual report by the Chartered Professional Accountants of British Columbia (CPABC) on investment trends across the province, there were 43,106 housing units started in 2022, down slightly from the 43,360 started in 2021.
Starting in early 2022, central banks around the world began to increase interest rates to combat inflation, resulting in significant and quick successions of interest rate increases. As of the writing of this article, the Bank of Canada’s (BoC) key interest rate stands at 4.5%, up from 0.25% at the start of 2022.
On December 7, the Bank of Canada (BoC) raised the overnight interest rate to 4.25%, another 50 basis point hike. This marks the seventh consecutive increase in 2022, up a total of 400 basis points from the 0.25% rate at the start of the year.