Ministry of Finance and Corporate Relations Joy K. MacPhail, Minister	This electronic version is for informational purposes only. The printed version remains the official version.

Report C:
THREE-YEAR ECONOMIC PLAN UPDATE

Introduction

Budget ’98 included a Three-Year Economic Plan designed to help British Columbia meet the challenges of an increasingly competitive global economy.

The plan was developed after extensive consultations with interest groups and initially included five key elements:

• continuing to reduce taxes for low and middle income families;

• revitalizing British Columbia's traditional resource industries;

• providing additional assistance for small business;

• preparing to meet the challenges of the knowledge-based economy; and

• reducing red tape and unnecessary regulation.

In mid-1998 an additional element was introduced to the plan:

• the capital envelope for 1998/99 was increased to $1.5 billion from the original plan of $1.25 billion and will rise to $1.9 billion in 1999/00. This initiative will provide a needed boost to construction activity across the province while enabling the government to accelerate the provision of needed infrastructure in the education, health and transportation sectors.

This report provides an update on each component of the Three-Year Economic Plan along with information about new initiatives contained in Budget ’99.

 
Overall Tax Reductions

Tax cuts are a key part of the three-year economic plan. The cuts in the three-year plan — combined with the tax reductions announced earlier and those included in Budget ’99 — will result in total provincial reductions of $1 billion by 2001/02.

This includes two measures announced in this year's Budget — the expansion of the corporation capital tax holiday for new investment to four years from the current two years, and the reduction in the small business corporate income tax rate to 5.5 per cent from 8.5 per cent.

If the impact of recent federal income tax changes on provincial revenues are taken into account, the total value of the cuts rises to $1.2 billion.

 
Tax Cuts for Families and Individuals

On January 1, 1999, as announced in the 1998 budget, the provincial income tax was reduced to 49.5 per cent of federal tax from 50.5 per cent. In total, the provincial personal income tax rate has been reduced by six per cent since 1995. In addition, because provincial income taxes are based on federal taxes, the tax changes introduced in the federal budget will reduce the provincial income tax by a further two per cent starting on July 1, 1999.

TABLE C1 TAX AND RESOURCE REVENUE REDUCTIONS ($ millions)

The combined impact of the tax cuts and rate freezes introduced since 1995 will be to reduce the taxes and costs for a single-parent family with two children and an annual income of $30,000 by about $1,200 annually.

When fully implemented, the tax changes introduced since 1995 will put over $500 million into the pockets of individuals and families in British Columbia.

TABLE C2 TAX CUTS AND RATE FREEZES INTRODUCED SINCE 1995 TYPICAL SAVINGS FOR BRITISH COLUMBIA FAMILIES

 
Revitalizing Traditional Industries

British Columbia's traditional resource-based economy has generally been hit hard by the economic problems in Asia and the associated fall in commodity prices. Nevertheless, the resource industries remain one of the mainstays of British Columbia's economy. In areas outside the Lower Mainland, these industries will remain a primary source of economic well being.

The three-year plan included comprehensive measures to revitalize the resource sector. During the last year many of the steps necessary to assist in the recovery of these industries have been taken.

 
Oil and Gas

Since Budget ’98, the government has announced a series of steps to streamline the regulatory environment facing the oil and gas industry, improve local infrastructure and improve the competitiveness of the royalty system, including:

• a revised royalty structure that sets gas royalty rates at least 20 per cent below the comparable rates in Alberta and lowers royalty rates for new oil wells;

• a new Oil and Gas Commission that creates a single-window process for overseeing all oil and gas operations and expediting new licences — the commission opened its doors in October 1998;

• a Fair Share Program which ensures that communities in northeast British Columbia receive an additional $113 million over the next 10 years to improve local infrastructure; and

• five-year memoranda of understanding with three northeastern First Nations to recognize treaty rights and provide the oil and gas industry with greater predictability of costs, timelines and operational guidelines.

 
Mining

Consultations with the mining industry have resulted in a series of initiatives to increase certainty of access and tenure and to encourage new exploration activity:

• a new Mineral Exploration Code to create a one-agency approach for exploration permit approvals;

• new legislation — the Mining Rights Amendment Act — to improve access to mineral tenures and establish the right to compensation where tenures are expropriated for parks;

• a $9 million mining exploration tax credit to encourage exploration in the province; and

• creation of a mining advocate position to streamline industry interactions with government.

 
Forestry

The forest sector continues to face substantial challenges. However, working with the industry and local communities, the government has taken significant steps, including the recently announced Forest Action Plan, to create a more diversified and sustainable future for the forest sector. The major reforms include:

• changes to the stumpage system that will save the industry over $200 million per year;

• initiatives to streamline the Forest Practices Code that will reduce industry costs;

• the Small Business 2000 Program, combined with changes to the Small Business Enterprise Program that will make more wood available, at fair market cost, to the value-added and independent wood manufacturing sectors;

• the newly launched community forest management pilot project (more than 80 communities have submitted expressions of interest); and

• adjusting the billing system to recognize the seasonal nature of logging in British Columbia, including introducing a monthly payment plan to allow companies to spread their payments over the whole year.

The overall impact of these initiatives will be to save the industry more than $700 million annually.

 
Fisheries

The long-term viability of the fishing industry will depend on a strong commitment to conservation, a diversified fishing fleet and greater value-added activities. To help meet these goals:

• Fisheries Renewal BC is increasing fish stocks through habitat restoration, protection and stock enhancement. Action is also being taken to add value to traditional and new species, and develop new products;

• over a 10-year period the amount of Crown land available for shellfish aquaculture will double and a one-window approval system will streamline licencing, leading to potential growth of 1,000 new jobs; and

• initiatives to assist the inland fisheries will help this $500-million industry grow substantially over the next five years, providing a significant boost to freshwater tourism.

 
Energy

British Columbia has a comparative advantage in power production and boasts among the lowest electricity costs in North America. Hydro rates have been frozen since 1993 and in 1998 consumer and industrial customers received a one to two per cent rebate on their 1997 billings.

Two major initiatives are underway to spur regional development through the use of the province's energy resources:

• Power for Jobs will make surplus power available for strategic new projects or for expansions of existing mining, plastics, or value-added forestry, agriculture and tourism facilities. For example, the government and Intrawest recently announced that the Power for Jobs Program will be used to expand snow-making capacity at Whistler/Blackcomb; and

• several new generating projects are planned, including:
  • a 240 MW high efficiency gas-fired cogeneration facility at the Fletcher Challenge pulp mill in Campbell River;
  • a second 240 MW cogeneration plant at the Pacifica Papers Mill in Port Alberni;
  • a 170 MW powerhouse to be constructed at the existing Keenleyside Dam on the Columbia River near Castlegar; and
  • a 45 MW gas-fired generator in Fort Nelson.

 
Agri-Food

The agriculture and food sector is growing and British Columbia producers are adopting innovative approaches to product development and marketing. The government has taken several steps to ensure the continued strength of the sector:

• eliminating the fuel tax for bona fide farmers;

• streamlining regulations through a 10-point plan to review environmental regulations affecting agri-food, a 6-point plan to review employment standards for agriculture, simplifying the tree fruit crop insurance program and improving the food safety and food quality legislation; and

• allocating an additional $1 million to an enhanced Buy BC program for the agri-food sector.

In addition to these sector specific initiatives, Budget ’99 extends the existing two-year capital tax holiday for new investments to four years for qualifying expenditures made after March 31, 1999. This will reduce costs for business by $20 million when it is fully phased in and will provide an immediate incentive for firms to improve their competitiveness by investing in new plant and equipment.

The impacts of the Asian Downturn and lower commodity prices are being felt most directly in regions outside the Lower Mainland, and particularly in small, resource-dependent, communities. While the Forest Action Plan and other initiatives to strengthen the resource sector will assist these communities, more needs to be done for those hardest hit by mill closures and layoffs.

The Premier's Regional Summits are helping to develop local economic strategies through partnerships between government, communities, First Nations and local business and workers. Three regional summits have already been held.

In the coming months, the government will be announcing new approaches to help boost British Columbia's regional economies and assist communities in transition.

 
Assistance for Small Business

The government is keenly aware of the role played by small business in creating new activity and jobs in the economy. To foster additional growth in this sector, the three-year plan included commitments to:

• raise the corporation capital tax threshold to $5 million by January 1, 2001, at which time fully 90 per cent of all businesses in the province will be exempt from the tax; and

• cut the small business corporate income tax rate by 20 per cent to 8 per cent by 2000 from 10 per cent in 1996.

Budget ’99 expands on the commitments to reduce small business taxes by accelerating and deepening the cut in the small business corporate income tax rate. Effective July 1, 1999, the small business rate will fall to 5.5 per cent. This is below the rate in Alberta and will be the second lowest rate in the country. This additional cut will put an extra $63 million annually in the pockets of small business owners to help them expand their operations and create new jobs.

 
Knowledge-Based Economy

Knowledge-based economic activity, and the high-tech sector in particular, has been one of the fastest growing segments of the economy in recent years. The high-tech sector alone grew by 7.2 per cent annually between 1990 and 1996, while employment growth during the same period totalled 55 per cent.

Although the resource sector will continue to be important, particularly in the regions, the province's future economic prosperity depends increasingly on developing a highly skilled and adaptable work force and nurturing industries that rely on these skills to generate economic growth and jobs.

The government is taking a comprehensive approach to encouraging knowledge-based activity including improvements in the K-12 system, new post-secondary spaces, combined with easier access to the post-secondary system and tax reductions and other incentives to assist knowledge-based industries. The major initiatives in each area include:

 
Investing in Education

• connecting British Columbia's 1,700 schools to the Internet through the Provincial Learning Network;

• increasing access to college and university by creating three new universities in the 1990s, the first new universities in Canada in 25 years, and increasing access by almost 15,000 spaces over four years;

• freezing tuition fees four years in a row, supporting the most comprehensive student grant system in Canada and increasing financial assistance to 8,500 students with dependents; and

• opening TechBC which will create 2,800 high-tech education spaces over the next five years.

 
High Tech

• reducing the top marginal income tax rate to 49.9 per cent over three-years to improve British Columbia's competitiveness as a place to work and live. Once this reduction is complete, the top marginal rate in British Columbia will be comparable to the rates in most other provinces;

• introducing changes to employment standards for high-tech companies to reflect the unique nature of the industry; and

• entering into partnerships in key industries including:
  • MTU/Canadian Airlines, an aerospace plant in Richmond, is creating 250 new jobs;
  • Avcorp Industries opened a new $32 million state-of-the-art manufacturing facility in Delta;
  • Ballard Power Systems is producing fuel cell-powered, zero-emission buses — the first of which are currently in service in the Lower Mainland;
  • IBM Canada and the government are partnering in a new high-tech development centre, one of only six of its kind in the world, specializing in new products and markets for government, the Internet, and industry; and
  • ISM-BC has opened the largest data processing centre in Western Canada in Victoria.

• To complement these initiatives, $20 million has been set aside in this budget to create new incentives for research and development in the province. The details of the program, which may take the form of grants or a tax credit, will be worked out with industry.

 
Film

• Since 1987, the film sector has grown by 300 per cent — the industry now employs 25,000 people, including direct and ancillary positions. It is estimated that direct expenditures exceeded $800 million in 1998, an increase of more than 25 per cent from the previous year. The three-year plan includes:
  • Film Incentive BC — four different tax credit programs to bolster the growth of British Columbia-controlled productions;
  • a very competitive production services tax credit to encourage further growth in foreign film production in the province; and
  • The British Columbia Film Commission is marketing the province as an attractive film-making location. British Columbia now stands first in Canada in foreign production.

• Since the introduction of Film Incentive BC in 1998, Canadian production in the province has increased by 67 per cent.

 
Reducing Red Tape and Regulation

The three-year plan included a commitment to review government regulations with a view to reducing unnecessary red tape and paperwork, while protecting critical environmental and workplace standards.

To meet this commitment, the Minister of Finance and Corporate Relations created a 16-person Business Task Force, which included members from business, labour and government.

The Task Force received over 500 suggestions from more than 100 organizations. In response, a Bill was introduced in the 1998 legislative session to streamline 33 provincial statutes. In addition, several projects have been initiated to focus activity on priority areas identified by the Task Force, including:

• development of a Business Lens to ensure that regulatory decisions are based on full information about the cost to business and other impacts;

• expansion of the one stop shopping (BC Business Connects) initiative of the Ministry of Small Business, Tourism and Culture;

• initiating a liquor policy review which recently released recommendations to increase flexibility in liquor licensing; and

• examining British Columbia's environmental review process.

A topic box in this report provides more details on the government's red tape and streamlining initiative.

TOPIC BOX STREAMLINING INITIATIVE

 
Building Infrastructure

The availability of high quality public infrastructure such as schools, hospitals and public transportation can improve British Columbia's attractiveness as a place to work and live. In addition, maintaining the government's capital program through periods of economic uncertainty can ease the impacts of the downturn, provide alternative sources of employment for construction workers and offer cost saving opportunities.

In 1999/00, the government will spend $1.9 billion maintaining and expanding the province's infrastructure. The major priority projects include:

• Year 2000 — a $100 million initiative to upgrade equipment and information systems in the health sector;

• Classroom Size Reduction — an initiative to build classrooms to reduce class size for kindergarten to Grade 3 students;

• Portable Reductions — an initiative to reduce school portables by 50 per cent;

• Technical University of BC — construction of the new technical university;

• Knowledge Development Fund — a $100 million six-year fund to upgrade research infrastructure in post secondary institutions, hospitals and eligible not-for-profit research agencies; and

• SkyTrain — Phase I expansion of SkyTrain from New Westminster to Vancouver Community College.

Additional details on the government's capital spending plans are provided in a topic box in this report.

 
Housing Incentives

In recent months, the impact of the economic downturn on the housing industry has become apparent. During most of the 1990s, residential construction was a source of considerable economic strength, primarily due to the influx of new residents to the province. Recently, however, despite significant improvements in affordability, on a per capita basis, housing starts have dropped to the lowest levels since the 1950s.

The current level of activity raises concerns about whether the industry will be able to quickly respond to future housing demands as the economy recovers.

To provide an immediate boost to the housing sector, government will announce incentives to increase residential construction activity. Details will be announced following consultations with the industry.

TOPIC BOX 1999/2000 CAPITAL PLAN

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