Alberta, once famous for the strength of its public finances, is now in a deep fiscal hole. The recent provincial budget projected the deficit for the current fiscal year at upward of $18 billion, on top of last year’s record $20-billion deficit. The province’s net debt will hit $82-billion this year, versus the $35-billion in net assets it held as late as 2008. True, its debt, at 24.5 per cent of GDP, remains less burdensome than most other provinces’, and barely half that of Ontario. But the trend line is not good.
How did things get in such a state? Is it because of the pandemic? Certainly that was a major contributor to the really large deficits of the past couple of years – but the province was running large deficits long before then. Is it because of the collapse of oil prices in late 2014? Again, yes in part – but the province was running deficits even before then. Indeed the province has run deficits in every year but one since 2008.
So Alberta’s deficits are not a short-term or cyclical thing: they’re chronic. But how could this be, in what has for decades been the richest province, by far, in the federation? What, or who, is to blame? Is it the fault, first, of the federal government, or more specifically, the federal equalization program? That’s a popular view in the province, egged on by Jason Kenney’s government, which will hold a referendum later this year demanding the program’s reform, or even abolition.
Former Alberta finance minister Ted Morton complained in a recent opinion piece in the Calgary Herald that equalization continues to pay out $20-billion a year to other provinces, even as Alberta’s debts have mounted to “previously unimaginable levels.” He urged readers to focus “on the real source of our downward fiscal spiral – Ottawa, and the billions of dollars that the federal government takes out of Alberta each year.”
But the federal government doesn’t get the money it pays for equalization from provincial governments: it gets it from taxpayers, in Alberta as in every province. It’s true that it “takes” more money from Alberta taxpayers in a typical year than it spends in the province – making Alberta the largest net contributor to federal finances, historically. But that is because Albertans are, even today, richer on average than the citizens of most other provinces, and less dependent on federal transfer programs – including equalization.
Maybe the fault lies closer to home. Perhaps, as others have suggested, it was the province’s failure to provide for the bad times during the good times, by banking surplus resource revenues in a state-directed investment fund, a la Norway’s oil fund. “Instead of saving Alberta’s increasingly massive non-renewable resource revenues for the future,” Max Fawcett writes in the National Observer, Alberta premiers starting with Ralph Klein “decided to spend it on underwriting artificially low tax rates,” in effect “borrowing from the future.”
But resource wealth doesn’t have to be kept in a government fund to be saved and invested. It can also be saved and invested in private hands. So far as Alberta’s relatively low personal and corporate income tax rates were underwritten by its resource revenues, they made possible higher rates of private investment, and consequent higher rates of productivity, income and ultimately tax revenues, than would otherwise be the case. As such those surplus royalties were invested in the province’s future, just as surely as if they had been invested by the government.
(Or rather, more surely: the history of government investment funds in Alberta, from the Alberta Heritage Savings Trust Fund in the 1980s to Alberta Investment Management Corp. [AIMCo] in the 2000s, is hardly an advertisement for this approach.)
Perhaps, then, the province’s tendency to chronic deficits has a rather more prosaic cause: a consistent inability to keep annual spending in line with annual revenue. Ah, but which is it – too much spending, or too little revenue? The Business Council of Alberta caused a stir with its recent report, which called for the province to implement, at last, a provincial sales tax – ideally, harmonized with the federal GST – until now an absolute taboo in Alberta.
While the report acknowledged that Alberta has “both a revenue and an expense problem,” it provided ammunition for those who have always argued that Alberta is, you should pardon the expression, undertaxed. It is true that Alberta has had, by most measures, the lowest tax burden of any province in the country. But what’s also true is that it has collected very nearly the most revenue, per capita – until recently, at least – thanks to its much richer tax base.
So, yes, if Alberta were to impose similar rates of tax, including a sales tax, as other provinces, it would undoubtedly raise more revenues than it does now – at least $13-billion more, according to the budget – and be in much stronger fiscal shape. But the same would apply if it spent the same, per capita, as other provinces – a point made quite forcefully in these pages by two analysts with the Fraser Institute.
Notwithstanding its conservative reputation, Alberta has led nearly all provinces in per-capita spending for decades, a position it maintained even in recent years. Had Alberta merely kept growth in spending over the past two decades in line with increases in population and prices, the Fraser Institute analysts calculate, it would have had more than enough revenue to stay out of deficit the whole time, and to have entered the pandemic in a much better fiscal position than it did.
But that’s too simple. You can’t look at spending in isolation from revenues. The reason Alberta governments have tended to spend so much, historically, is because they have had so much revenue to spend – or rather, because they expected to have so much. That is, the problem isn’t the level of Alberta’s revenues, so much as their volatility. Overreliance on boom-and-bust resource revenues has encouraged Alberta governments to ratchet up spending, in good times, only to find themselves hoist without a ladder when the bad times returned. For spending, once increased, is very difficult to decrease.
That’s the case for a sales tax: to bring stability to provincial revenues, and therefore to provincial spending. If the province is “to cut its coat to suit its cloth,” it needs first to find a more reliable cloth supply.
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