Alberta needs balanced attack on financial woes

This op-ed by Bob Ascah, Trevor Harrison, and Richard Mueller appeared in the Edmonton Journal on September 12, 2019.

The government’s release of the MacKinnon report on Alberta’s financial situation confirms concerns that the panel’s limited mandate, focused solely on expenditures, would prohibit a full examination of bigger issues of balance or long-term fiscal sustainability.

Due to its intentionally limited scope, the report fails to provide the government and Albertans with the information necessary to make sound financial decisions about the province’s current situation or to plan for the future. Indeed, it seems a calculated distraction from the real issues, giving misdirection to an over-hyped debt problem.

Our recent report, prepared in parallel to the MacKinnon report, shows that despite significant recent turbulence, Alberta’s economy remains strong. Real GDP and GDP per capita growth remain positive. Labour force participation rates, employment rates, and wages remain above the Canadian average. In the long term, Alberta’s economy will likely regress to the Canadian average due to a decline in the price of non-renewable resources, upon which the Alberta economy for too long has been over-reliant. The province needs to prepare for this “new normal.” While it may be a tough pill to swallow for many Albertans, we are no longer “exceptional”— at least in terms of our economy — and how we finance our public services must be reconsidered.

Alberta does not currently face a “critical financial situation,” as the MacKinnon report asserts. Though caution is warranted, Alberta’s debt is manageable. Compared to Canada and its three largest provinces — Quebec, Ontario, and British Columbia — Alberta’s expenditures relative to the size of its economy are below average.

In terms of the public sector, neither its size nor average weekly earnings are out-of-line over time with those found in these other jurisdictions for educational services, health care and social assistance, and public administration — the three industries with the vast majority of public employees.

Alberta’s real difficulty in balancing the books lies in its anemic tax effort. Alberta’s coffers fall consistently short of what is necessary to pay for important public services which Albertans value and expect. In past decades, the revenue hole was filled by non-renewable resource revenues, primarily bitumen, oil, and gas. But those days are gone, and unlikely to return.

The hole can only be filled through a mix of various tax measures. Fortunately, Alberta has enormous tax room to meet this need. Figures from Alberta’s Treasury Board and Finance show that Alberta would bring in $11.2 billion if it taxed at the rate of B.C., and $11.3 billion if it taxed at the rate of Saskatchewan.

As crazy as it seems, even if it collected $10 billion in additional taxes, the province would still boast over a billion-dollar “Alberta advantage” over every other jurisdiction, with no deficits.

There are two ways to balance the books: either through cuts to expenditures or through measured increases in revenues — or, of course, a balance of both. Clearly, finding efficiencies and opportunities for cost savings in government programs is a worthwhile effort. But the government simply won’t be able to balance the budget by looking only at expenditures, except by introducing drastic cuts to services.

So, we suggest two additional remedies for Alberta’s fiscal ailments. First, a gradual weaning of Alberta politicians and the public away from resource revenues to fund ongoing expenses through a combination of tax increases to foster revenue stability. Albertans, and their political leaders, must face up to the fact that resource revenue can no longer pay 25 percent of every dollar spent on public services.

Second, as a specific measure to fill the revenue void, a provincial sales tax should be adopted, preferably harmonized with the federal GST. We concur with the vast array of scholars, including most economists, who contend based on the best evidence that Alberta should add such a tax to the arsenal of fiscal tools necessary to secure Alberta’s fiscal future.

The time is long overdue for a rational, balanced, and fact-based discussion with Albertans about the province’s financial circumstances. Like most Albertans, we are not fans of tax increases. But addressing the future of Alberta’s finances from a broader societal perspective, a modest harmonized sales tax is preferable to the types of draconian cuts in necessary government services, such as health and education, being telegraphed by the MacKinnon report and subsequent comments.

Through good fortune, Alberta is a wealthy and much-blessed province, but we can do better. The time is now.