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Ahead of the Oct. 27 tabling of Budget 2015, the Parkland Institute released a new report, Hard Math, Harder Choices: Alberta’s Budget Reality, written by economist Melville McMillan. The report analyzes the reality of the fiscal situation facing the new NDP government in Alberta and looks at the options available to address the situation over the next five years.
Here are six things from that report that Albertans should know about the provincial budget.
1. Spending in Alberta is not “out of control.”
Despite claims to the contrary, spending in Alberta has been essentially flat since 2008–09. In that year, expenditures in the province were $10,138 per person, and by 2014–15 per capita expenditures had increased only to $10,464.
This is even more clearly illustrated when population, inflation and increases in incomes are all taken into account (as is done by looking at measures of average household income). From 1999–2000 to 2013–14, program spending in Alberta remained constant, averaging 20.3 per cent of household income, and only ranging from a low of 19.4 per cent to a high of 21.7 per cent. Since 2010–11, the trend in spending has actually been downward: from 21.7 per cent of household income to 18.7 per cent of household income in 2014–15.(See the infographic at the top right of this page.)
2. Alberta does not spend more than all other provinces.
Despite what then premier Jim Prentice claimed in March, Alberta is not a high-spending province. In fact, Alberta has not been the highest spending province per capita since 1994–95. For the past two decades, Alberta has ranged from second to seventh highest in spending compared to other provinces, and has ranked fourth on average.
3. Alberta has no net debt.
Despite significant increases in accumulated debt since 2012–13 — driven in large part by the approach of the Alison Redford government to borrow to finance capital spending — Alberta remains the only province to have negative net debt. Net financial assets in 2014–15 were $20.1 billion, compared to $12.9 billion in accumulated debt.
However, declining financial assets and plans to continue borrowing to finance capital spending means that, unless something is done, this situation won’t last.
4. Alberta does have a budget problem (and it’s worse than most people think).
The drop in global energy prices in late 2014 has had a serious impact on Alberta’s revenues, which are expected to be roughly $7.2 billion less in 2015–16 compared to the previous year.
Unfortunately, that’s not the whole story. In recent years the province has increasingly turned to borrowing to finance needed capital (infrastructure) spending. Borrowing for capital expenditures is not included in the reported “deficit,” which includes total revenues but only operating expenditures. As a result, though confusing, the province can report a balanced budget while still needing to borrow to finance its total expenditures. Taken together, the combination of program and capital spending reveals that Alberta’s true deficit is actually in the order of $10 billion.
Previous provincial governments have covered up the depth of the province’s fiscal problems by depleting the province’s savings and borrowing for capital investment even when resource revenues were high. This is evidence of a structural deficit — a deficit due to government revenues even in good times not being sufficient to meet expenditures.
5. Finding “efficiencies” isn’t enough.
The existence of a structural deficit means that the provincial government needs to find a more realistic long-term balance between expenditures (including both program and capital spending) and revenues.
While there are undoubtedly ways to find savings in government spending, Alberta’s level of spending relative to average household income is already well below the provincial long-term average, and is approaching the levels last seen during the depth of the cuts during the Ralph Klein era.
More significant cuts would mean spending at levels that Albertans have never seen. To put the severity of such an austerity budget in perspective, the spending level implied by the Prentice budget would have been equivalent to eliminating schooling from the budget.
Put simply, unless Albertans are willing to accept drastically lower levels of government services and capital spending — cuts far deeper than even the Klein cuts — increased revenues will be required.
6. Alberta has room to move on the revenue side.
The good news is that Alberta has a tremendous capacity to raise more revenues while still remaining the lowest-taxing province in Canada.
While nobody necessarily wants to pay more taxes, we must recognize that Alberta’s taxes are extremely low compared to other provinces. Albertans in 2014 paid $11.6 billion less in taxes compared to citizens in B.C., the next lowest taxing province.
If government resource revenues recover as slowly as projected, by 2019–20 the Alberta government could maintain its current level of program spending and eliminate the need to borrow for capital projects and still maintain a “tax advantage” of $5 billion compared to the next lowest taxing province. Under such a scenario the average Albertan would still pay $1,200 less in taxes compared to British Columbians (and even less compared to all other provinces). ❚
