Fiscal illusion is an economic concept that describes a phenomenon in which decisions are made absent the knowledge of their true costs or ultimate consequences.
It is an apt description of the current state of affairs in Alberta, where for years taxpayers have enjoyed enviable benefits, the price tag of which exceeded the revenue citizens were providing government.
Over the years, the gap created by that disparity was filled by royalties from the province’s thriving oil and gas industry. But when those resource dollars shrank to a fraction of what they once were, Alberta’s fiscal illusion was fully revealed.
This is but one of many useful observations that can be found in a new report by the Business Council of Alberta on the province’s dire fiscal situation. In this case, the sponsor of the study is significant because of the report’s two central recommendations: one, that the province introduce a harmonized sales tax; and two, that it take over the federal government’s carbon tax program. Both would provide the government much-needed and sustainable sources of income.
Many economists have argued in favour of these ideas for some time; the business community has not. But now, it would seem that the penny has dropped and even the province’s top business leaders recognize that the financial path the government is heading down leads to an ugly dead end.
In fact, without some miraculous return to the good old days for the oil and gas business, Alberta’s current course will lead to economic ruin.
Every page of the council’s report contains at least one eye-popping revelation that underscores just how dramatic a shift the province’s fortunes have taken over the past decade or so. The report notes, for instance, that it became the norm for Albertans to receive $1,000 more from public spending on goods and services than they paid into the system in the form of taxes and other fees, a gap filled by royalty revenue.
But that revenue has become more volatile over the past two decades. In fact, over that period, resource dollars have increased by as much as $8.3-billion and decreased as much as $6.7-billion, year over year. The province has seen resource-revenue fluctuations of more than $3-billion eight times during the past 20 years, and more than $6-billion on six occasions.
Think about it: A drop of $6-billion in revenue represents 13 per cent of the provincial budget. How does a government plan when one of its biggest sources of revenue is so unpredictable?
Resource-revenue projections for the fiscal year 2020-21 are down nearly $4-billion from initial expectations. The province expects to collect just $1.7-billion in royalties for the current fiscal year, the lowest total in 30 years.
And this is just a glimpse of what can only be described as a devastating economic landscape.
The report also addresses federal transfer payments, suggesting that, contrary to a narrative perpetuated by Premier Jason Kenney and others, the province isn’t getting “jobbed” by Ottawa. It even suggests equalization reforms would be unlikely to radically affect Alberta’s fiscal reality.
But it also notes – and this is may come as a surprise to Alberta separatists – the amount of federal dollars flowing into the province over the past decade has increased considerably. In fact, the province’s federal take is growing at a far higher rate than that of anywhere else in the country. “Since 2009/10, per capita federal transfer payments to the Alberta government have increased by 20 per cent, about double the average growth rate in the other nine provinces,” the report states.
Oh, the things you won’t hear from Mr. Kenney.
In the end, the business council recommended adding a sales tax to the federal goods and services tax to create a harmonized sales tax. Depending on the level of the provincial tax, that could mean billions annually for the treasury. So could repatriating the federal carbon tax, which the Alberta government is fighting in court. Again, the council suggests this could become a dependable revenue stream for a desperate government.
Mr. Kenney was quick to reject both suggestions. He said a sales tax would have to be approved in a provincial referendum, and that the province wouldn’t abandon its court challenge of the carbon tax.
And so, the status quo remains. But next week, the provincial government will unveil a new budget. It is sure once again to portend the fiscal reckoning that is coming – a future in which the status quo will simply not be an option.
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