What you need to know about Alberta Budget 2017

Twenty-two months after assuming power in the province, Alberta’s NDP government has introduced the third budget of its mandate. Budget 2017, dubbed by the government as the “Working to Make Life Better” budget, 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 government decided to maintain public spending, but some ministries will see their budgets trimmed either this year or over the course of the next two or three years. However, as illustrated below, Alberta’s spending levels, 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.

Here are 10 key things you need to know about Budget 2017 on revenue, debt, interest charges, the Heritage Fund, overall program expenses, and expenses for health care, long-term care, education, advanced education, children’s services, and community and social services.

1. Revenue shortfall

Alberta’s deficit for 2016-17 is $10.8 billion, but when you factor in the accounting treatment for the phase out of coal-fired power generation—the fact that the whole $1.1 billion is accounted for in the 2016-17 deficit, but the province will actually pay for the phase-out with carbon tax funds over the next 14 years—the actual projected deficit for 2016-17 is closer to $9.8 billion.

Alberta’s projected deficit for 2017-18 is $10.3 billion. Alberta’s forecasted deficit for the year to come is not the result of "out of control" government spending; Alberta actually has the second leanest public sector in the country relative to the size of its economy.

Instead of being the product of excessive spending, Alberta’s deficits in the 2015, 2016, and 2017 budgets are the result of the dramatic decline of resource royalties and Alberta’s continuing status as the lowest-taxed province in Confederation by $8.7 billion, even after the suite of revenue changes introduced by the NDP over the last two years.

The following chart from Alberta Treasury Board and Finance depicts our province’s revenue disadvantage (page 93 of the Fiscal Plan). 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.

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 1990s.

Besides not having a PST, Alberta also has no payroll tax, no health care premiums, and the second-lowest small business tax rate amongst the provinces. A recent opinion poll released by Parkland Institute shows Albertans are willing to pay a bit more income tax to enhance core services like health care, long-term care, and education. The poll also shows Albertans believe high-income earners and large corporations should be paying higher taxes than they currently are. This means there is room for the government to introduce more progressivity in the personal income tax system. Another recent poll showed two-thirds of respondents believe Alberta’s tobacco taxes—which remain unchanged in Budget 2017—aren’t high enough. 

Despite the fact that the province doesn’t collect enough revenue to cover core public services, let alone expenses to maintain and improve our capital stock (infrastructure), Budget 2017 didn’t see the government exercise any of the revenue reform options available to them.

2. Revenue change over time

In 2015-16, Alberta’s public revenue dropped by 14.1%, the largest decline in 14 years. Chart 1, “Alberta Revenue Change Over Time,” provides a 20-year snapshot of what it means to be a government on a resource roller coaster—during boom times public revenue surges by over 10% (some years saw over 20% increases), and during a global financial crisis (2008-09) or a commodity price collapse (2015-16) the bottom falls out of government revenue.

Chart 1: Alberta Revenue Change Over Time

Source: RBC, March 16, 2017 (2016-17 forward are projected numbers) 

The sudden and significant hole in the province’s 2015-16 finances was almost entirely the result of the collapse of the international price of oil that began in late 2014. However, even before the revenue chasm that appeared in the last two years, Alberta already collected significantly less revenue than any other province relative to the size of its economy. 

Alberta’s revenue shortfall isn’t a new problem. The problem dates back to Ralph Klein’s tenure as premier, specifically his Progressive Conservative government’s shortsighted decisions to dramatically cut resource royalty rates in the late 1990s and income tax rates for high-income earners and large corporations in 2000.

In 2001-02, Alberta’s revenue dropped by 14.1% because of Klein’s tax cuts. Despite the fact that we live in the richest jurisdiction in North America, Albertans have been living under permanent austerity since Klein eviscerated the government’s ability to pay for core public services and infrastructure.

The government’s prediction that its revenue will increase by 4.8% in 2017, a further 5.8% in 2018, and a further 8.7% in 2019 continues a longstanding Alberta tradition of hoping higher oil prices in the not-too-distant future will save the day. The NDP inherited a structural revenue problem from the PCs, but unfortunately the NDP’s refusal to implement further revenue reform in Budget 2017 leaves Alberta with an inadequate plan for paying down the debt it is about to incur. One is left to wonder when, if ever, the government of Alberta will heed the lessons of past oil price downturns and set reasonable levels of taxation that would enable the province to get off the resource roller coaster and put the extra revenue collected during boom years in the Heritage Fund.

3. Net debt, net debt-to-GDP ratio, and debt interest charges

Klein’s tax cuts for high-income earners and large corporations made Alberta overly reliant on resource royalties, so much so that even with high oil prices, the PCs ran a deficit in six of their 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 had almost $4 billion in assets in excess of debt in 2015-16. In the current fiscal year, which ends on March 31st, Alberta moved 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.

Table 1 shows Alberta is forecast to have $23.2 billion in net debt in a year’s time. Budget 2017 estimates that Alberta will have accumulated $35.3 billion in net debt by April 1, 2019.

Table 1: Net Debt, 2017-18 ($ Billions)

Source: RBC, March 16, 2017 (figures for NL, ON, MB, and SK are for 2016-17) 

But, you may be wondering, how big is our projected net debt for the new fiscal year compared to the size of our economy? Table 2 shows that Alberta still has the best balance sheet in the country, and is therefore uniquely positioned to take on the debt it is about to incur.Source: RBC, March 16, 2017 (figures for NL, ON, MB, and SK are for 2016-17) 

Table 2: Net Debt-to-GDP Ratio, 2017-18 Projected

Source: RBC, March 16, 2017 (figures for NL, ON, MB, and SK are for 2016-17) 

Alberta not only has the best balance sheet in the country, but we also pay less in annual debt interest charges than the other three highly populated provinces. Table 3 provides the latest available data on provincial debt interest charges. In 2015-16, Quebec and Ontario each paid over $10 billion in interest charges, while BC paid about $2.8 billion. In 2017, Alberta will pay about $1.4 billion in interest charges, and about $1.8 billion in 2018.

Table 3: Debt Interest Charges in 2015-16 ($ millions)

Source: Department of Finance Canada, Fiscal Reference Tables, October 2016 

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.

4. Alberta Heritage Savings Trust Fund

As it did in Budgets 2015 and 2016, the NDP 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. According to the latest quarterly update, “For the first nine months of the fiscal year 2016-17, the Heritage Fund earned a 7.4 per cent return and $1.5 billion in net income. As of December 31, 2016, the fund’s assets were worth $19.1 billion on a fair value basis. Over the past five years, the Heritage fund earned 11.7 per cent average annual rate of return.” 

5. Program expenses per capita and program-expenses-to-GDP ratio

As shown in Table 4, Alberta’s program expenses for the coming fiscal year are forecast to rank third among the provinces, behind Saskatchewan and Newfoundland and slightly ahead of Manitoba. For the past two decades, Alberta has on average ranked fourth in per capita program spending. 

Table 4: Program Expenses Per Capita, 2017-18 Projected

Source: RBC, March 16, 2017 (figures for PEI, ON, MB, and SK are for 2016-17) 

How much does Alberta spend on programs compared to the size of our economy? As shown in Table 5, Alberta has the second-leanest public sector in Canada relative to the size of its economy. Alberta led this category from 1993-94 through 2015-16 and is projected to return to the number one position in 2018.

Table 5: Program-Expenses-to-GDP Ratio, 2017-18 Projected

Source: RBC, March 16, 2017 (figures for ON, MB, and SK are for 2016-17)

6. Health care

The government of Alberta doesn’t have a spending problem, but Budget 2017 continued the direction from last year, where key ministries began to see their budgets trimmed. 

The NDP government’s goal has been to reduce the rate of health care spending growth. In the six years prior to Budget 2016, the health care budget increased by an average of 6% per year. In Budgets 2016 and 2017, the NDP has managed to maintain front-line health care services while keeping the annual health care spending increase to a bit less than 3% per year, slightly less than inflation plus population growth.

One way the government contained costs in 2016 was by renegotiating the pay of physicians through a new deal with the Alberta Medical Association agreed to in August 2016. The new compensation model rewards physicians for the amount of time and the quality of care given to patients, not just the number of services provided.

The Health budget will remain steady in 2017, with the 3.3% increase matching the estimated inflation plus population growth for the year. The health budget is forecast to be trimmed in 2018 by 0.9%.

7. Long-term care

While the NDP is doing pretty well on health care overall, they aren’t doing enough to address the long-term care crisis they inherited from the PCs.

In the 2015 election, the NDP promised to open 2,000 public long-term care beds by the end of 2019, including 500 new beds in 2015.  An October 2016 report from the Parkland Institute shows that "the newly elected NDP government failed to deliver on its commitment to open 500 long-term care spaces in 2015" (page 12). 

The report also explains that the NDP’s promise of 2,000 long-term care beds is much too small to address Alberta’s long-term care crisis. The following chart from the report illustrates that Alberta’s population of seniors 85 years of age and over nearly doubled from 33,273 in 2001 to 61,437 in 2015, while the number of long-term care beds has flatlined over the same period.

 

A recent opinion poll released by Parkland Institute shows 57% of Albertans (including 73% of NDP suporters, 47% of PC supporters, and 51% of Wildrose supporters) would be willing to pay higher taxes to provide more access to long-term residential care for seniors. 

While it's encouraging that the government is adding 200 public long-term care beds in a new Calgary facility and 145 new public beds in a refurbishing of CapitalCare Norwood in Edmonton, the NDP promised an average of 500 new public beds per year in the 2015 election and they haven’t met that target in Budgets 2015, 2016, or 2017.

8. Education

After winning the 2015 election, the NDP reversed the previous government’s proposed cuts to education. In Budget 2016, the NDP government increased the education budget to fully pay for projected enrolment growth. Budget 2017 sees the government continue its commitment to pay for enrolment growth. By paying for enrolment growth in the last two budgets, Alberta schools retained more than 800 jobs and 1,100 new teachers were hired.

On March 2, the first day of the current legislative session, the government introduced Bill 1, An Act to Reduce School Fees. Assuming the bill passes, which is a safe bet given the NDP’s majority, it will legislate an end to school board fees for instructional materials or supplies and for eligible students taking the bus to and from their designated school. These two types of fees cost Albertans about $54 million in 2015-16, representing about a quarter of the fees collected annually by public school boards. 

Unfortunately, the government has not eliminated or begun to phase out the more than $100 million in tax dollars that annually goes toward funding private schools, many of which charge more than $10,000 per student in tuition fees, making them inaccessible to most Alberta families. In February, then-Edmonton Public School Board Chair Michael Janz pointed out "five Canadian provinces have already ended private school funding, including Ontario, where private schools are still thriving." If the government were to phase out funding for private schools, that $100 million could go toward reducing class sizes in public schools and/or eliminating more of the school fees charged to parents of students in public schools.

The Ministry of Education will receive a 0.65% cut in 2017 and a further 0.7% cut in 2018.

9. Advanced education

In the first two years of their mandate, the NDP has delivered on their promise to provide sustainable funding for post-secondary education. This includes a government-funded tuition freeze for the last two years, making our universities, colleges, and technical schools more accessible.

Stable funding for Advanced Education is especially important during an economic downturn because many people return to school in such times to upgrade their training. While it's positive to see that the tuition freeze will continue for a third year, it’s disappointing that Advanced Education overall will receive a real cut of 0.65% in 2017 and a further 1.4% cut in 2018.

10. Children’s services and community and social services

In January 2017, the government announced it was splitting the Ministry of Human Services in two, with the "new Ministry of Children’s Services ... given a mandate to fix longstanding child intervention problems," while the Ministry of Community and Social Services "leads income, employment, disabilities and community-based supports, family violence prevention, and family & community support services.” 

In Budget 2016, the Ministry of Human Services was funded $4.4 billion, a figure that includes the new Alberta Child Benefit that was announced in November 2015. Combined, the Ministry of Children’s Services and the Ministry of Community and Social Services will be funded $4.7 billion in 2017. Children’s Services is the big winner in Budget 2017; it will receive a real increase of 2.9% in 2017 and a further hike of 4.2% in 2018. Community and Social Services, on the other hand, will be cut by 1.15% in 2017 and a further 1.5% in 2018.

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Photo credit: Government of Alberta under a Creative Commons licence.