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Viewpoints: Fiscal woes due to revenue shortfall, not overspending

April 5, 2016 Ian Hussey, Parkland Institute

As low oil prices persist, Albertans don’t need an economist to tell them what they already know: our provincial economy is in recession for the second straight year. But it may surprise many Albertans to learn that our provincial government is still in a stronger financial position than its counterparts in other provinces. In the 2016 fiscal year, Alberta will move into a net debt position for the first time in 15 years, but will still have substantially less debt and more financial assets than other provinces.

While Alberta’s projected deficit of $10 billion for 2016/17 sounds very large, relative to the size of our provincial economy, it is not. The deficit is not insignificant, of course, but at about 2.8 per cent of our gross domestic product (GDP), it is smaller in relative terms than the 3.5 per cent of GDP deficit that then prime minister Stephen Harper ran after the 2008/09 global financial crisis.

Alberta’s projected deficit for 2016/17 is not the result of “out of control” government spending. Alberta actually has the leanest public sector in the country relative to the size of its economy, and this has been the case since 1993/94.

In per capita terms, Alberta’s program expenses for 2015/16 are forecasted to rank third among the provinces, behind Newfoundland and Labrador and Saskatchewan and slightly ahead of Manitoba. Alberta’s 2015/16 program expenses are projected to be only $34 per capita above 2014/15, whereas the program expenses for both ­British Columbia and Saskatchewan are forecasted to increase by more than $300 per capita over the same period. 

Instead of being the product of excessive spending, Alberta’s deficits in the NDP’s 2015 and 2016 budgets are the result of the dramatic decline of resource royalties and its status as the lowest taxed province by at least $8.5 billion even after the NDP raised income taxes for large corporations and high-income earners last year.

In short, Alberta has a revenue problem. The province’s revenue change for 2015/16 is projected to be -12.8 per cent, the worst decline since 2001/02. Even before the recent revenue decline, Alberta already collected a lot less revenue than any other province relative to the size of its economy.

Alberta’s inability to generate enough revenue stems from then premier Ralph Klein’s shortsighted decisions to dramatically cut income taxes for high-income earners and large corporations about 15 years ago. These tax cuts made our province overly reliant on resource royalties, so much so that, even with high oil prices, the Progressive Conservatives ran a deficit in six of their last seven years in power. All six of these deficits would have been much larger had the ­Tories not decided to reduce assets in excess of liabilities by 67 per cent, from $39.4 billion in 2007/08 to $13 billion in 2014/15.

Even after the PC’s mismanagement of public finances and the NDP’s first year of stimulus budgeting, Alberta is projected to have $4 billion in assets in excess of debts come budget day (April 14). But Alberta’s no-net-debt status is about to change because the NDP has sensibly chosen to maintain public services and jobs during the oil price downturn while continuing their plan to stimulate the economy with infrastructure investments. The government’s high credit rating will ensure low interest rates on newly incurred debt, and its Fiscal Planning and Transparency Act, which accompanied the October 2015 budget, limits its debt to 15 per cent of GDP (about $55 billion) or less than half of the average debt-to-GDP ratio of the other provinces.

Last year the NDP began to stabilize the province’s finances by raising taxes on high-income earners and large corporations, and by hiking the tobacco tax, the locomotive fuel tax, the liquor markup and the insurance premium tax by small amounts (the new carbon tax doesn’t come into force until 2017). These measures are a reasonable start given the current weakness of the Alberta economy, but are insufficient to deal with the revenue problem that the NDP inherited. Unfortunately, the NDP’s refusal to consider further tax increases in Budget 2016 leaves Alberta with an inadequate plan for paying down the debt it is about to incur.

Although Alberta doesn’t have a deficit or a debt problem yet, it will before too long if the government doesn’t deal with its revenue problem. ❚

Ian Hussey is a research manager at the Parkland Institute, where his work focuses on political economy and labour studies. All numbers cited are from RBC’s March 22, 2016, updated Canadian Federal and Provincial Fiscal Tables.

This opinion column represents the views of the writer and does not necessarily reflect the position of the Alberta Teachers’ Association.

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