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Business Commentary Oil-poor Alberta goes with the flow, while Newfoundland paddles furiously

Finn Poschmann is president and CEO at the Atlantic Provinces Economic Council.

In fresh budgets this week, provincial governments in Newfoundland and Labrador and in Alberta took wildly different approaches to burgeoning rivers of debt, triggered by collapsing oil revenues. Newfoundland is paddling furiously against the current, while Alberta has decided to go with the flow.

In Newfoundland and Labrador's case, the drain on residents' wallets will be inescapable. Consider the excise tax on gasoline: It will go up by 16.5 cents per litre, doubling the prior rate.

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That puts the province's fuel excise tax above Vancouver's level, and the budget presents it purely as a revenue measure – one that will cost more than $500 per household, per year. There is no talk in the budget speech or materials of "carbon pricing," and those words are likely to be unwelcome in Newfoundland for years to come.

Then there are across-the-board personal income-tax rate increases in 2016 and 2017. Add in the new federal top rate, and the province's earners with incomes above $200,000 join the over-50-per-cent income-tax-rate club.

Finally, there is the harmonized sales tax, up two percentage points to 15 per cent. This policy shift, and political reversal, was an easy call for a province looking for money. When the federal government lowered its HST rate to 5 per cent in 2007, it consciously left room on the table that provinces could use to finance more of the services they provide. Now, three Atlantic provinces have done so.

Newfoundland and Labrador introduced even more tax increases – there is a "temporary deficit reduction levy" that kicks in for taxable incomes above $20,000, and tops out at $900 per tax filer.

Corporate income-tax rates are going up a little, although revenue will be down – that is because there is no longer so much corporate income to tax. Intriguingly – and this is something that many economists would recommend – the province declared a simple end to the manufacturing and processing deduction, which heavily favoured investment in manufacturing rather than services. That is a good call, as well, since the outlook for services is rather brighter than for manufacturing, and accounts for a bigger part of the economy.

So while corporate tax revenue will be down in Newfoundland and Labrador, the overall tax take will be up by a breathtaking amount: about $2,000 per household per year.

On the spending side, no program area is left untouched. But neither are any major areas heavily touched. In the short time the new Liberal government has been in office in St. John's, however, it has put the squeeze on direct spending.

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What's harder to squeeze is the provincial payroll. That's up by almost 6 per cent year over year, which isn't surprising, given that it matches the terms of a bundle of collective agreements signed in recent years. Sadly, this will be the largest legacy of Newfoundland and Labrador's recently expired oil boom: a public-sector payroll the province can't afford, and an expenditure path that the government has not yet shifted by much.

This trajectory – monstrous deficits for the size of the economy, adding to an already large debt, and debt interest that already takes up 12 per cent of the budget – certainly justifies grave steps. And to its infinite credit, the government has presented a seven-year plan that eventually looks for Brent crude prices above $70, and that shows a path to somewhere in the general direction of balance.

Not so in Alberta, a province in far less grave fiscal condition. The fiscal plan of Premier Rachel Notley's NDP government looks out only to March, 2019, by which time, if all goes according to plan, provincial liabilities will have increased, from March, 2016, by about $19,000 per household.

And, for Alberta, 2016-17 is a watershed year. After a long haul, going back a few governments, the tide has turned – the provincial government's liabilities will now exceed its financial assets.

This is an unusual accomplishment. In March, 2009, Alberta's net financial assets were $32-billion. By March, 2019, they are set to be minus $33-billion.

In getting there, the government plans to tax – Albertans will have a new "carbon levy" on gasoline of 4.49 cents per litre, a shadow of Newfoundland's fuel excise tax – and it plans to spend. The money raised will mostly be rebated back to households, and the government will spend, too, on infrastructure of various sorts, which will be debt-financed.

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To be clear, Alberta has very low tax rates by Canadian standards, and public debt is almost non-existent – so far. Newfoundlanders have much higher taxes, and enormous public debt.

The residents of Alberta, like those in Newfoundland and Labrador, have now seen how quickly things can change. In Alberta, it is a repeat performance, and governments evidently did not learn from past cycles.

One question today is who should be happier, or unhappier? Governments in both provinces, and their taxpayers, find themselves in fiscal positions they simply did not need to be in, owing to past fiscal mistakes. And Newfoundlanders' wallets are getting a soaking today, as they begin to paddle out.

In Alberta, however, the real soaking won't arrive for a few years. And at that time, they may wish to revisit their government's choices today.

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