Soaring health costs a wakeup call that resources matter

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One hidden time bomb in British Columbia's finances is the rising cost of health care. What role can resources play in ensuring quality services can continue to be provided?

Why resource revenues matter so much

British Columbians have the highest life expectancy among Canadians, the lowest cancer rate, and are the least likely to die of heart disease.

post-image.jpgWhile these health stats are impressive, they also mean the province will be home to a proportionately larger population of elderly persons who inevitably turn to their medical providers with increasing frequency and intensity.

So the news Feb. 16 that the province's ministry of health requires $1.5 billion in increased spending over the next three years could not have come as a great surprise.

But it does raise the important question of how to pay for these increases. Reallocations within budgets, increased borrowing, or higher revenues to government, are the only options. 

Taking away from other priorities is never easy, and the government is already committed to $8.2 billion in borrowing over the next three years to pay for new hospitals, schools, and other infrastructure. Increasing revenues through new taxes is never a popular option.

Growing the economy

That leaves growing the economy as the best option for a government. Growth throughout the economy is essential, and natural resources especially. This is because resources form a special part of the BC economy distinct from other sectors, for the simple reason that they alone produce not only jobs and taxes, but also royalties to government.

In the 2016/17 budget we are seeing the inevitable result of delayed approval processes for critical resource infrastructure such as mines, pipelines and LNG facilities.

This year, royalties from all natural resource activities – including natural gas, Crown land tenures, forestry, mining and minerals, and energy  –  will amount to nearly 5 per cent of total government revenues.

But this is a low number compared to recent history, and look at what is happening.

bcroyalties.pngThe short term reason for this trend is simple: low global commodity prices.

But we are also seeing the effect of cancelled or delayed resource projects. While some residents see this as a positive if they connect resource usage with environmental damage, lost opportunities are costly to our economic stability. The chart shows that government financial planners foresee even further tightening of royalty income over the next couple of years.

To get to the heart of why this is a legitimate concern, it's important to understand that resources account for much, much more than royalties alone.

Consider the following chart that shows the ranking of different kinds of economic activity in terms of capital investment:

 capitalspending.png

 

Natural resources – forestry, mining, natural gas – are consistently the second-largest source of capital investment. Nearly $8 billion was budgeted for infrastructure and equipment for the British Columbia resource industry in 2014, the most recent year for which we presently have data. (The source of this data can be found on page 74 here and in previous years' editions.)

Investment of this type drives all kinds of activity. This fact really shines through when you look at long-term trends. The data for the following three charts is drawn from the annual Ministry of Finance fiscal review over a number of years. In each chart, the red line represents the annual value of capital investment into natural resource projects.

We looked at three areas: the number of businesses created each year; the value of goods exports; and the number of housing starts. What is shown is here is quite startling - a tight correlation between resource investment and those three factors.

Over 20 years, it is a consistent pattern. 

Business incorporations

BUSINESSES.png

Over the past two decades there has been a tight correlation between annual capital spending for resources and business start-ups. Whether upward or downward, it is clear that resources spur individuals to start new businesses because of the demand for goods and services for these massive investments. Those involved in chambers of commerce will readily understand the correlation, but it is something more people should know about.

Goods exports

EXPORTS.png 

Here again we see the impact of resource investment. The more is spent on building infrastructure, the greater our capacity to send resource commodities to international markets. Since most of BC's goods exports are resource related, we can be confident that this linkage exists.

Housing starts

HOUSING_STARTS.png 

Things that need to get built require workers, and workers need homes for themselves and their families. Hence the tight correlation evident here between housing starts and resource investment. 

(A a note on sources: All data in the three charts above was drawn from the Financial and Economic Review, an annual publication of the Ministry of Finance.)

Summary

The three charts together make a compelling case. Although there has been a bit of a cottage industry lately in trying to prove that resources do not matter, the numbers speak the truth. With this compelling evidence, we at Resource Works are confident that British Columbia remains foundationally dependent on quality investment in responsible resources. Diversification is needed, but we must maintain focus on resources.

Whether it is health care, schools, or any other social benefit, if we want sustainability over time, resources remain a crucial part of the solution.

Clearly it is a major social challenge today to help build broad social confidence that the risks and benefits of our resource dependencies are properly governed and managed. At Resource Works, our work is cut out.

Stewart Muir is an author, historian and journalist. He is founding executive director of the Resource Works Society. 

Got a question, suggestion, or comment? Drop us a line at info@resourceworks.com


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