A shadow hangs over British Columbia’s political and economic future.
Last spring, B.C. went through one of its most tumultuous and uncertain elections in years. No party received the majority of seats in the May 9 election, creating a hung legislature and political uncertainty. And there was the uncertainty regarding who the Green Party would support to create a government: the New Democratic Party or the Liberals.
And, more crucially from an investment perspective, the NDP/Green alliance created policy uncertainty. The commitments to increase personal income, business and carbon tax rates, stop the Kinder Morgan Trans Mountain pipeline expansion, and raise the minimum wage to $15 an hour all introduce uncertainty about B.C.’s economic future and increase investment uncertainty.
Research shows that policy uncertainty can drive down business investment by six to 10.5 per cent.
To see how the election created uncertainty in B.C., the Fraser Institute created a proxy measure using newspaper reporting of the word “uncertain” in the province from 2009 to the present. The study was inspired by 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. For example, in 2013 when polling predicted the Liberal government might not win a fourth mandate, and the most recent election, where there was no clear winner.
While previous provincial elections 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 Liberal majority 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 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/Green 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 (PR). While PR electoral systems are purported to be more democratic, they also result in more political parties and more minority governments. In other countries with PR systems, those minority governments form coalitions with other parties. In parliamentary systems, coalition governments are often shorter in duration, and they are higher spenders and debt accumulators than single-party governments.
Coalition partners, knowing their time in office is limited, increase spending to improve their electoral fortunes. And 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, businesses and households are uncertain about future tax hikes. That uncertainty impedes investment and entrepreneurship today.
Any government can increase economic policy uncertainty. In B.C., the previous majority Liberal government created uncertainty by implementing policies like the foreign homebuyers’ tax. The tax was intended to introduce an element of uncertainty to limit foreign investment in Vancouver’s housing market, with the hope of causing home prices to level off.
There are numerous examples from other Canadian provinces where majority governments have increased their debt or created an uncertain investment climate. But moving to an electoral system that encourages minority governments is a recipe for persistent policy uncertainty – minority governments simply have greater negative impacts on business investment.
Given the composition of B.C.’s political parties, if the NDP/Green commitment to adopt proportional representation goes ahead, we can expect more coalition governments, and more political and policy uncertainty.
Lydia Miljan is an associate professor of political science at the University of Windsor and a senior fellow of the Fraser Institute.