pages_show_blog_post_wide
Other kinds of pages: http://www.parklandinstitute.ca/albertas_immediate_concern_is_limited_revenue_not_debt
http://www.parklandinstitute.ca/albertas_immediate_concern_is_limited_revenue_not_debt?recruiter=
begin include: _nav
end include: _nav
1-column layout

Alberta's immediate concern is limited revenue, not debt

Eleven months after assuming power in the province, Alberta’s NDP government has introduced the second budget of its mandate.

Budget 2016, dubbed by the government the "Alberta Jobs Plan," is a stimulus plan aimed at maintaining public services and investing in infrastructure. A counter-cyclical fiscal approach – or stimulus budgeting as it is more commonly referred to – is intended to stabilize the economy during a downturn. By contrast, an austerity budget, or one full of cuts, would pull money out of the economy, thus prolonging and deepening the recession.

Overall, the NDP government decided to maintain public spending, but some ministries will see their budgets trimmed either this year or over the course of the next three years.

Spending on health care will increase 3% in 2016, a hike equal to the estimate for inflation plus population growth. However, the three-year average increase for health care spending is 2.5%, which is a small cut when the 3% estimate for inflation and population growth in each of the next three years is accounted for. This restrained approach to health care spending stands in stark contrast to the 6% growth in health care spending in recent years under the Progressive Conservatives.

The budget for human services will grow by 4.8% in 2016, meaning the ministry will see a real expansion in their annual budget. Much of this increase is the result of the new Alberta Child Benefit and the Enhanced Alberta Family Tax Credit – both of which are targeted at lower-income families. However, the NDP has deferred its election promise to introduce $25 per day childcare. 

Education, with a 2.5% average increase over three years, will at least fully fund projected new student enrolment, while schools are in line to see a large share of infrastructure investment. Mandatory school fees, however, will remain in place despite the NDP’s election campaign promise to eliminate them.

Since the 2015 election, Alberta’s official opposition Wildrose Party has raised concerns about the government’s plan to run a series of substantial deficits and the debt the government is taking on to build needed infrastructure. Not surprisingly, the Wildrose position hasn’t changed in the intervening months.

The day before the budget was tabled the party released its Budget Sustainability Recommendations. The Wildrose claims that by following its 10 recommendations, “the government could generate $2 billion in savings this year without laying off workers or harming front line services.”

For the second straight year, the Wildrose has failed to produce an alternative budget which would enable Albertans to see how the right-wing party would govern differently than the centre-left NDP. However, in an interview the day after Budget 2016 was released, Wildrose leader Brian Jean asserted that if his party were in power they would balance the budget by 2019 – five years sooner than the government currently intends. Jean stated he wouldn’t borrow more money, wouldn’t entertain tax increases, and wouldn’t hire new employees to replace public sector jobs lost through attrition. Jean claimed his party would bring the provincial budget back to balance with 2-4% cuts to expenditures this year and in each of the following three years.

Jean’s math seems questionable. As Don Braid, the Calgary Herald’s senior political correspondent pointed out, with the contingency fund being empty “the NDP will borrow $5.3 billion in the new fiscal year to cover the day-to-day business of government. That borrowing will reach $8.4 billion the following year and $6.8 billion the year after that.” If the Wildrose were in power now and decided to cut government spending to achieve a surplus by the 2019 election, that would likely mean cutting 6-8% of expenditures this year and in each of the next three years if we also account for inflation plus population growth. According to the estimates calculated by University of Alberta economist Melville McMillan last October, this level of cuts would bring Alberta’s rate of public spending well below the point it was at after former premier Ralph Klein made deep spending cuts in the late-1990s.

It seems unlikely that the majority of Albertans would accept such drastic cuts to public services, not to mention the fact that the Wildrose’s commitment to not borrow more money would mean the complete abandonment of infrastructure spending to either maintain our current capital stock or to grow it by building much-needed new schools and bigger-ticket items, such as the Calgary cancer centre.

A Mainstreet Research/Postmedia poll in February showed 62% of Albertans don’t think balancing the budget is a priority, a 10% increase in this preference from October. Only 15% of Albertans polled said they wanted the government to balance the budget before 2019-20, “even if it has to raise taxes or cut services.”

If this poll accurately reflects the opinions of the electorate it's good news for the government, because last month it announced it was discarding plans to get the province back in the black by 2019.

Still, like the official opposition, many Albertans are concerned with the government’s plan to run deficits until 2024, and with Alberta’s increasing public debt. However, as illustrated below, Alberta’s deficit and debt are not concerns in need of immediate redress. Rather, the Government of Alberta’s most immediate problem is that it doesn’t collect enough revenue to maintain the province’s social programs and infrastructure in the long term.

Let’s look at the deficit first.

Shortly after the Alberta budget was announced yesterday, the Royal Bank of Canada released its revised Canadian Federal and Provincial Fiscal Tables, which help put Alberta’s current fiscal situation in perspective.

As you can see from the following chart, “Budget Balance Relative to GDP, 2016-17," most Canadian provinces are planning to run deficits this year. Canada as a whole is no longer in recession, but several provinces continue to be. British Columbia is actually the only province projecting a (small) surplus for this year, Quebec is hoping to break even, and the six other provinces included in the chart, including Alberta, are forecasting deficits (data for Nova Scotia and Prince Edward Island are not available). 

Figure1.jpg 

The Government of Alberta is forecasting a $10.4 billion deficit for the 2016 fiscal year. At 3.3% of our provincial GDP, Alberta's projected provincial deficit is less than the 3.5% of GDP deficit that then-prime minister Stephen Harper ran after the 2008-09 global financial crisis.

Alberta has not run a deficit larger than 3% of provincial GDP since 1992-93, when the deficit was 4.3% of GDP. Fortunately, the province is much more capable of absorbing this fiscal shock now because of our significant financial assets.

Alberta’s projected deficit for 2016-17 is not the result of “out of control” government spending. As is illustrated in the chart, “Total Expenses Relative to GDP, 2016-17,” Alberta actually has the leanest public sector in the country relative to the size of its economy. This has been the case since 1993-94.

Figure2.jpg

As illustrated in the next chart, “Program Expenses Per Capita, 2016-17,” Alberta’s program expenses for this fiscal year are forecast to rank third among the provinces, behind Newfoundland and Labrador and Saskatchewan and slightly ahead of Manitoba. For the past two decades, Alberta has on average ranked fourth in per capita program spending

Figure3.jpg

Instead of being the product of excessive spending, Alberta’s deficits in the NDP’s 2015 and 2016 budgets are the result of the dramatic decline of resource royalties and its continuing status as the lowest-taxed province in Confederation. Saskatchewan, the next-lowest-taxed province after Alberta, will bring in at least $7.5 billion more in revenue even after suite of revenue changes introduced by the NDP government since it took power.

The following chart from Alberta Treasury Board and Finance depicts our province’s revenue disadvantage. The green portion of the bars shows the substantial revenues that all other provinces generate through their respective provincial sales taxes (PST). Alberta remains the only province without a PST.

Figure4.jpg

In short, Alberta has a revenue problem. The province’s revenue change for 2015-16 is projected to be -13.2%, the worst decline since 2001-02. Even before the recent revenue decline, Alberta already collected significantly less revenue than any other province relative to the size of its economy. “Revenue Relative to GDP, 2016-17” shows that Alberta brings in much less revenue relative to the size of our economy compared to the other provinces. 

Figure5.jpg

Alberta’s inability to generate sufficient revenue stems from then-premier Klein’s short-sighted decisions 15 years ago to dramatically cut income tax rates for high-income earners and large corporations. These tax cuts made Alberta overly reliant on resource royalties, so much so that even with high oil prices, the Progressive Conservative government ran a deficit in six of its last seven years in power, reducing the province's assets in excess of liabilities by 67%, from $39.4 billion in 2007-08 to $13 billion in 2014-15.

Even after the PC’s mismanagement of public finances and the NDP’s first year of stimulus budgeting, Alberta is still projected to have $4 billion in assets in excess of debts as of Thursday’s budget. In the fiscal year that just began, Alberta will move into a net debt position for the first time since 1998-99 because the NDP has chosen to maintain public services and jobs during the oil price downturn while continuing its plan to stimulate the economy with infrastructure investments.

The chart below, “Net Debt, 2016-17 ($ Billions),” shows Alberta is forecast to have $10 billion in net debt in a year’s time. Budget 2016 estimates that Alberta will have accumulated $33.2 billion in net debt by 2018-19.

Figure6.jpg

But, you may be wondering, how big is our projected debt for the new fiscal year compared to the size of our economy? The following chart shows that Alberta is uniquely positioned to take on the debt it is about to incur. As Premier Notley explained on Friday, “the debt-to-GDP ratio in Alberta is the lowest in the country now and it will be for the foreseeable future.” 

Figure7.jpg

As our provincial debt increases this fiscal year and over the next two, the amount of money Alberta needs to pay in interest charges will roughly double, from about $1 billion to $2 billion. The following table, “Alberta Debt Charges ($ millions),” shows that Alberta’s interest payments for the current fiscal year are roughly the same as they were in 2000, when the province was celebrated for its newly net-debt free status.

Figure8.jpg 

In last week's rebuttal to Premier Notley’s televised pre-budget speech, Wildrose leader Brian Jean argued, “Over the long haul, ballooning interest payments mean less money for hospitals, schools, teachers and nurses.” This is a curious assertion since, as mentioned above, the Wildrose has indicated it would eliminate borrowing and thus cut far more money from hospitals, schools, teachers, and nurses than will occur as a result of the relatively minor increase to Alberta’s debt charges stemming from the government’s fiscal plan.

The last chart we’ve generated for you, “Debt Charges, 2014-15 ($ Millions),” shows the latest available data from Finance Canada on the debt charges each province pays. As you can see, Ontario and Quebec paid significantly more in debt charges in 2014 than other provinces. BC paid about $2.5 billion in interest payments that year, about $500 million more than Alberta will pay in interest after we incur $33.2 billion in debt over the next three fiscal years.

Figure9.jpg

Overall, Alberta is still in an enviable financial position compared to other Canadian provinces, with significant financial assets and relatively little debt, especially compared to the size of our economy. 

As it did in Budget 2015, the government has inflation-proofed the Alberta Heritage Savings Trust Fund, thus maintaining the real value of this substantial financial asset for use by future generations. The Heritage Fund also generates investment income for the province. In the first nine months of last fiscal year, the Heritage Fund delivered $1 billion in net income to Albertans; so maintaining the real value of the Fund makes good fiscal sense. 

The NDP government began last year to stabilize the province’s finances by raising taxes on high-income earners and large corporations, and by hiking the tobacco tax, the locomotive fuel tax, the liquor markup, and the insurance premium tax by small amounts (the new carbon tax – or as the Notley government prefers, carbon levy – doesn’t come into force until 2017). These measures are a reasonable start given the current weakness of the Alberta economy, but are insufficient to deal with the structural revenue problem inherited from the PCs.

Unfortunately, the government’s refusal to implement further revenue reform in Budget 2016 leaves Alberta with an inadequate plan for paying down the debt it is about to incur. It was therefore unsurprising on Friday when the bond rating agency DBRS downgraded Alberta’s credit rating from triple-A to double-A. In December, Standard & Poor’s downgraded its evaluation of Alberta’s credit rating from triple-A to double-A+. This means it will cost our provincial government a bit more to borrow money, but, as we saw above, our annual interest payments are small compared to other highly populated provinces like Ontario, Quebec, and BC.

The province’s revenue shortfall has many prominent Alberta business and labour leaders discussing possible revenue reform options. During a breakfast event in Calgary on Monday, Calgary Chamber of Commerce president Adam Legge presented Minister of Finance Joe Ceci with “a pile of questions around some notional sales tax” from Chamber members.  Minister Ceci responded that his government is “looking for efficiencies. We’re working to be a shock absorber. We’re stimulating the economy. If Albertans have a different view, generally, on where we should be going for revenue, then let’s hear it. But we’re doing what we said we would do.” Ceci’s comments imply that the government remains open to discussions about needed future revenue reform.

On Friday, Premier Notley was also asked about the possibility of introducing a PST. Notley explained that the NDP did not campaign in the 2015 election on implementing a PST, and that her party would not break that campaign promise. However, she left the door open by adding, "in the long-term, is this a conversation we need to have? I think it is. But not right now.” 

Some long-time supporters of Parkland Institute were surprised when our director Trevor Harrison penned an op-ed two months ago calling for a PST.  Such a reaction is fair given Parkland’s 20-year history of arguing against regressive forms of taxation. While a PST (with a rebate for low-income households) is not ideal progressive policy, remaining dangerously reliant on resource revenue by refusing to introduce significant revenue reform increases the likelihood of a future Alberta government returning to the slash-and-burn budget approach of premier Klein in the late-1990s.

On Friday, Alberta Federation of Labour President Gil McGowan argued in an op-ed that if Alberta “had a tax system like the one in Saskatchewan, the Alberta government would have been able to balance its budget this week – even with oil at $40 a barrel.”  This assertion may be a touch optimistic, but McGowan’s point that our provincial revenue reform discussion needs to be about more than simply introducing a PST is important.

In broad terms, many prominent Albertans have come to recognize that Alberta's government cannot maintain anything near the level of public services Albertans have come to enjoy without additional revenue. Premier Notley is correct that she does not have a mandate to introduce a PST, but she has also shown leadership in suggesting that Albertans need to have a robust and honest discussion about the pros and cons of introducing a PST.

At the same time, organizations like Parkland Institute have argued for years that our province needs to stabilize its revenues by changing our personal and corporate income tax systems. The NDP made some tentative headway in this regard last summer, but a full discussion on where government revenue reform goes next needs to be open to considering additional changes to our income tax systems.

Photo credit: Premier of Alberta under a Creative Commons licence

 

Related reading

Get timely research and analysis from Parkland in your inbox.

Subscribe to email from Parkland

Your donation supports research for the common good.

Donate to Parkland Institute
end include: pages_show_blog_post_wide