After years of implicit demands for services that have dramatically expanded the size and cost of government, and a simultaneous insistence on a low tax regime, no provincial sales tax and occasionally even a “prosperity bonus,” something had to give in Alberta.
With the disappearance of some $6-billion in projected oil-and-gas revenues, Albertans have a fresh opportunity to stop living on their capital, that is, to end their government’s reliance on drawing down their oil-and-gas assets – and to inject some fiscal realism into the province’s budget-making.
Premier Alison Redford has spoken in a televised address about an engagingly alliterative “bitumen bubble.” But the fall of the prices that Alberta can charge for its energy exports, over the past 10 months, is not a bubble in the familiar sense of a bursting of unsustainable demand, a cyclical decline of the kind that Albertans have often suffered before. Instead, the cause is a long-term rise in the supply of energy in the United States, which means less need in that country for Alberta’s oil.
Ms. Redford is holding an Alberta economic summit on Feb. 9, though it is hardly likely that she and Doug Horner, the Minister of Finance, will make major changes to their budget, which will be delivered less than a month later, on March 7. Rather, the summit will be part of a campaign to shift public opinion, an undertaking that may well need two or three budgets.
The provincial government would be well-advised to deal first with controls on spending, and then consider tax reform later. The public is likely to be more receptive in principle to prudence of the kind that many people act upon in their private lives (or at least acknowledge to themselves that they could and should do so) – more, that is, than to the imposition of any new tax or other similar charges such as health-care premiums.
The Alberta advantage” is a phrase associated with Ralph Klein, the former premier. It can be seen in Alberta’s annual public spending on health care (according to the CIHI’s most recent figures): $4,972 per person, compared with a pan-Canadian average of $3,692.
This difference approximately corresponds to the 30 per cent of Alberta’s government revenues that typically come from oil-and-gas royalties rather than from taxes – in other words, a depletion of capital.
There have been wise and praiseworthy efforts to replace that capital. In 1976, when Peter Lougheed was premier, the Heritage Savings Trust Fund was established to make strategic investments in new businesses, but in 1987 new payments into the fund ceased.
The Alberta Sustainability Fund was established in 2003, with the less ambitious goal of providing protection against cyclical downturns in commodity prices. This respectable countercyclical intention has not been adhered to; even in some good years, the fund has been drawn upon to help make budget deficits smaller.
In a time of abnormally low interest rates (to a great extent a result of public policy), the raison d’être of the Sustainability Fund is itself dubious. Borrowing through issuing bonds on the open capital markets would be much less expensive to the Alberta treasury than withdrawing money from the fund, which has a better rate of return than the world’s long-suffering bondholders.
The provincial government ought also to take a hard look at public-sector compensation. Last month, the Fraser Institute published a study that concluded that public-sector employees in Alberta have an advantage of 10.3 per cent over private-sector employees. Moreover, an overwhelming majority of public-sector employees have defined-benefit pension plans, that is, pensions that are not subject to the ups and downs of government revenue.
As for the province’s physicians, their average revenue is 14 per cent higher than the average across Canada as a whole, according to the Canadian Institute for Health Information, as of 2010-2011, the most recent year for which the numbers have been assembled – the figure of $350,000 is somewhat misleading, as it includes staff, office rent and other expenses, but the comparison with the equivalent pan-Canadian number of $307,000 is telling.
Before long, Alberta will have to revise its tax policies by letting go of its taboo against a provincial sales tax. The 22 years of the formerly execrated federal Goods and Services Tax have shown its worth, its efficiency and particularly its resilience through the vagaries of the business cycle; indeed, Alberta should adopt the Harmonized Sales Tax. But for the present, Ms. Redford is probably right not to push the province’s citizens too far in too short a time; the exaggerated view of the degree to which they have a free-market economy, in contrast to the other provinces, is quite ingrained.
Ms. Redford has overstated the element of surprise in the decline of Alberta oil exports to the United States, by comparison with what was foreseeable 12 months ago. The Bank of Montreal and CIBC, both of which she herself cited in a supporting document, gave quite correct predictions on the prices Alberta would be able to charge today. The requirements of political presentation does not always encourage accuracy. But that is all the more reason for getting Alberta’s on a sound basis comfortably before the next election – likely to be in 2016. That does not allow much fiscal foot-dragging.