The full extent of Alberta’s economic decline was on display last Thursday in the province’s budget, the United Conservative Party government’s first full fiscal plan since the onset of the coronavirus.
It’s a budget awash in bad, then worse, then quite awful news. The province will still be running a massive deficit in 2023-24, even with a spending freeze that will necessitate cuts to public-sector jobs and wages, as Alberta Bureau Chief James Keller reports.
But is that plan rife with wishful thinking? Premier Jason Kenney says he isn’t about to repeat the mistake of some of his predecessors in building a budget on expectations of buoyant energy revenues. True enough, the Alberta budget does take a relatively pessimistic view of oil and gas prices. But as I write in this week’s Tax and Spend, there are some parallels between the current government and past Alberta administrations that substituted hope for hard political choices.
Speaking of tough politics, few topics get more contentious more quickly than the notion of a provincial sales tax in Alberta as a solution to the province’s fiscal woes. Although academics and business groups have pressed the government to implement a sales tax, Mr. Kenney is dismissing the idea of increasing revenue. The province is taking only the “tiniest of baby steps” in that direction, writes columnist Kelly Cryderman. But it will take at least two years, perhaps three, before the government moves to commission a third party to look at the “efficiency and appropriateness” of Alberta’s revenue structure.
And Alberta’s tough times are sure to reverberate across Canada, as I write in an in-depth look at how the province’s rapidly shrinking fiscal capacity is shaking up the billions Canada spends each year on equalization payments to poorer provinces.
Mr. Kenney’s government wants that program pared back, with some of the freed-up funds diverted into fiscal stabilization payments that would help out Alberta, among others – a point driven home in Thursday’s budget.
Last week’s Tax and Spend on Cameco Corp.’s legal victory generated lots of debate in the comments section, including by one reader who took issue with the contractual arrangements at the heart of the dispute over transfer pricing. In short, Cameco had set up a subsidiary in Switzerland to sell its uranium in Europe, creating a structure under which the commodity was sold internally to that Swiss unit at a fixed price, but subsequently on the open market. Although the fixed price was in line with market conditions when the arrangement was established, uranium demand boomed in the following years, and market prices shot up. That meant the subsidiary booked most of the profits, which were then subject to Switzerland’s lower tax rates.
One reader commented that selling at fair market value, rather than a fixed price, would be inherently fairer. It certainly looks that way in retrospect, knowing that uranium prices shot up in the mid-2000s (although they drifted downward in the early years of that decade). Given that knowledge, it certainly looks like Cameco made a very advantageous decision when it opted for a fixed transfer price.
But prescience is not the test the court applied. Indeed, the original judge critiqued some expert evidence submitted by the Canada Revenue Agency for leaning on hindsight, in attempting to prove the Cameco contract was not a legitimate transaction by pointing to the subsequent rise in prices.
Instead, it examined whether any two parties might have come to such an arrangement – in other words, might one company wanted to have sold a fixed-price contract for uranium and would another wanted to have taken up the other end of the deal? (In doing so, the court also rejected the CRA’s contention that the correct test should be whether Cameco would have signed the same deal with an unrelated company.)
And, speaking of hindsight: The market for uranium weakened considerably after 2007, and again in the wake of the 2011 Japanese nuclear disaster. By 2017, Cameco had decided to restructure its operations, shifting much of its marketing activity back to Saskatchewan. But, given the long-term nature of uranium contracts, some of the deals made by its Swiss subsidiary remain in operation.
Measured thoughts: You can’t fix what you can’t measure. It’s true for carpenters, corporate consultants and, quite possibly, finance departments and central banks. My colleagues Matt Lundy and David Parkinson both have insights on that issue in recent pieces. Matt explores the discrepancies in labour market data, as a gap emerges between the economic picture portrayed by the Survey of Employment, Payroll and Hours and the more widely cited Labour Force Survey. And David’s column takes a look at Statscan’s recent backtrack on changes to how it gauges inflationary pressures.
Fiscal ripples: Once upon a time, the US$1.9-trillion that U.S. President Joe Biden is aiming to spend under his stimulus plan would have been a lot of money. But Capital Economics argues in a recent research note that the effect of that spending will be muted, even though it is equivalent to 1.4 per cent of global GDP. The aftermath of the coronavirus will dampen the impact of that spending on commodity prices and U.S. imports. But the U.S. spending spree could have one important political consequence, Capital Economics says. Where the U.S. goes, other countries may feel freer to follow. “Such a U.S.-induced shift in fiscal thinking would be positive for global growth,” the research company writes.
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