By Justin Hatherly
AIMS on Campus Fellow
Since coming to power in the face of a collapse in oil prices, the NDP government of Alberta has continually run fiscal deficits. This has seen Alberta, once a net creditor with assets in the bank, become a net debtor again for the first time since 2004.
Given the uncertainty about future commodity prices, many economic analysts have cautioned the Alberta government to show a degree of restraint. If oil prices remain low, Alberta might find itself in a position in which the growth in revenues will perpetually be unable to keep pace with the growth in expenditures, thus putting the province into a downward spiral of decreasing confidence, a growing interest burden and possible higher taxes.
Unfortunately, in its recently unveiled 2017 budget, the NDP government refused to change course. In the 2017 to 2018 fiscal year, the fiscal deficit is poised to be $10.3 billion.
This is a far cry from the heady days of oil prices in excess of $100 a barrel, when it looked like the provincial government had the capacity to cut taxes and increase program spending all while running sizeable surpluses.
Given the fragile state of the Alberta economy, balancing the budget immediately may be politically impossible and economically undesirable. However, given commodity price volatility, it is imperative that Alberta make two key reforms: 1) begin to steadily bring down the deficit to a manageable level and 2) design a tax system that is less susceptible to gyrations in the price of oil.
It is utterly critical that the deficit be cut. If oil prices remain depressed, Alberta could soon be unable to finance its burgeoning spending. If revenue growth remains weak, the high cost of government will soon become unsustainable.
Cutting spending without causing widespread social dislocation is definitely attainable. At present, Alberta spends in excess of $11,500 per capita while neighboring British Columbia spends just over $9,300 per capita.
There is no evidence to suggest that the quality of public services in BC is any worse than that in Alberta.
To bring down per capita spending, Alberta could consider imposing wage rollbacks on the public sector. Public sector employees in Alberta earn up to 10 percent in excess of their private sector counterparts for similar positions and earn the highest salaries of provincial employees anywhere in Canada.
Ensuring sustainable and fair public sector compensation is a reasonable expectation given Albertans working in the private sector have recently been subject to substantial wage restraint or even long spells of unemployment. Additionally, subsidies to business (which ironically for an ostensibly social democratic government, have proliferated under the NDP) are another candidate for substantial reductions. The consensus among most economists is that there is little empirical evidence that they promote economic growth. Most evidence instead suggests that they distort relative prices and direct labor and capital away from more productive ends.
Secondly, for too long Alberta’s finances have remained at the mercy of the price of oil. Given the inherent instability to commodity prices, relying too much on resource revenues can promote suboptimal fiscal policy. In years of high prices, spending growth tends to exceed a sustainable rate, leaving policy makers to scramble for cuts in bust years.
Instead of maintaining such dependence on resource revenues, the Alberta government should instead pursue growth enhancing tax reform. This could entail imposing a provincial consumption tax (value added tax) coupled with sharp cuts in both personal income taxes and the corporate income tax. Such a reform should be done on a revenue neutral basis and not add to add to the tax burden (as the core of Alberta’s fiscal problem stems from excessive expenditure, this would be inappropriate) to promote economic growth by improving incentives to work, save and invest and ensure greater revenue stability over the commodity cycle (as personal consumption revenues tend to be less volatile than income or resource revenues).
Commodity revenues could be used to instead refinance Alberta’s heritage fund, pay down debt or pay for sorely needed capital expenditures. However, to ensure that politicians resist the temptation to spend a oil price driven revenue windfall, it would be wise to impose legislation stipulating that the bulk of resource revenues (say 75 percent) could not be used to fund operational spending.
The political economy of public finance in Alberta has been deficient for decades now. During a boom, politicians have taken spending up to unsustainable levels and then struggled to pay for enhanced programs during times of weak oil prices. If the NDP government continues on its current path, it could truly endanger the future productive capacity of the Alberta economy.
The province must immediately begin to reduce expenditures and would be advised to design a tax system that is not so dependent on highly volatile commodity revenues.
Filed under: Economics Tagged: Alberta budget
