Ron Kneebone is areas director for social and economic policy at the School of Public Policy, University of Calgary
Governments provide citizens with valuable public services, from clean water to health care to national defence and many things in between. While Canadians sometimes take these things for granted, it is safe to say they value these services very highly. Even a few days without access to clean water or electricity would serve to remind us all of just how much we value the things governments do on our behalf.
Of course, we as citizens pay for these services with our taxes.
We pay taxes based on our income, our spending, on how much we drive and fly, even on how much we smoke and drink. And that is our contract with government: We will provide them a fraction of our incomes and they will provide us with valuable services that we would not likely be able to have if we did not pool our resources.
But quite often that contract is broken. That happens when a gap opens between the cost of the services provided to us by our governments and the amount of our incomes we provide to them to pay for those services. To fill that gap, governments borrow money. As anyone who borrows money knows, borrowing too much can get you into trouble, and the power of compound interest is not your friend.
Governments periodically need to relearn this lesson, but happily the conventional wisdom among most governments is that it is a mistake to allow the gap between the services they provide and the taxes they collect to grow too large.
But there are some governments in Canada that have consistently and persistently failed to learn this lesson.
Those governments have another way of filling the gap between what they spend and what they collect in tax revenue from citizens. They have access to sometimes enormous amounts of revenue made available to them from the sale of non-renewable resources. The big earner is oil, but some governments also collect revenue from the sale of potash, uranium and other ores. As reported in a recent research paper for the School of Public Policy, Alberta and Saskatchewan both paid for 22 per cent of program expenditures in 2013-14 using non-renewable resource revenues.
Newfoundland and Labrador paid for an astounding 32 per cent of its spending from its oil revenue.
Using oil revenue to fill the gap between what governments spend and what they collect in taxes is a high-risk budgeting strategy.
It is high risk because oil revenue is notoriously volatile and unpredictable, putting governments in the position of trying to fund health, education and social services with revenue they cannot count on. But more than that, it is a policy that encourages wasteful spending.
Without the need to beg forgiveness from voters for increasing their taxes to pay for these things, governments in oil-rich provinces tend to spend without much attention being paid to whether they are getting value for money. Thus, as in Alberta over the past 20 years, per capita spending on health care can nearly double in inflation-adjusted dollars with seemingly no concern expressed over the fact there has been no noticeable shortening of waiting times or improvements in health outcomes. Overreliance on oil revenues thus leads to a vicious cycle of increased spending opening an ever wider gap between spending and taxes and so leaving the government more and more vulnerable to a sudden fall in oil prices.
And that, of course, is exactly what has happened recently. Oil prices have plummeted and now the extent to which Alberta, Saskatchewan and particularly Newfoundland and Labrador are reliant on resource revenues has been exposed.
Newfoundland is facing a very large deficit and has responded with significant increases in tax rates and with spending cuts. Alberta's recently deposed Conservative government tried to fill the same prescription and was driven from office. I dare say the government in Saskatchewan is lying low and thankful for relatively steady potash prices.
Borrowing from future generations of voters or spending the revenue collected from the sale of non-renewable resources are really two sides of the same coin. They both involve taking from future generations without their permission and they both invite spending that is unrestrained by the discipline that comes from voters expressing their opinion on proposals to increase taxes. While governments that rely on borrowing have learned that this is a dangerous policy, governments that rely on selling their resources have not. It's a lesson they need to learn.