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Viewpoints: Alberta’s revenue shortfall persists despite signs of economic renewal

March 28, 2017 Ian Hussey, Parkland Institute

Following two years of recession, a collapse of energy sector investment and an unemployment surge, green shoots are beginning to appear in Alberta. The provincial economy is forecast to grow by 2.4 per cent in 2017, driven by oil and manufacturing exports, government infrastructure spending, and reconstruction in Fort McMurray. Employment increased in six of the last seven months, and full-time positions have increased by 24,000 since July.

Budget 2017 saw the provincial government maintain public services, but some ministries will see their budgets trimmed either this year or next. However, Alberta’s spending levels, deficit and debt are not concerns in need of immediate redress; Alberta actually has the second leanest public sector in the country relative to the size of its economy. Rather, the government’s most immediate problem is that it doesn’t collect enough revenue to maintain its social programs and infrastructure in the long term.

Instead of being the product of excessive spending, Alberta’s deficits in the 2015, 2016 and 2017 budgets are the result of the dramatic decline of resource royalties and Alberta’s continuing status as the lowest-taxed province in confederation by $8.7 billion, even after the suite of revenue changes introduced by the NDP.

In 2015/16, Alberta’s public revenue dropped by 14.1 per cent, the largest decline in 14 years. However, even before the international price of oil began to plunge in late 2014, taking 90 per cent of Alberta’s annual resource royalties with it, Alberta already collected significantly less revenue than any other province relative to the size of its economy.

Alberta’s revenue problem dates back to Ralph Klein’s tenure as premier, specifically his Progressive Conservative government’s short-sighted decisions to dramatically cut resource royalty rates in the late 1990s and income tax rates for high-income earners and large corporations in 2000. Despite the fact that we live in the richest jurisdiction in North America, Albertans have been living under permanent austerity since Klein eviscerated the government’s ability to pay for core public services and infrastructure.

Klein’s tax cuts made Alberta overly reliant on resource royalties, so much so that, even with high oil prices, the PCs 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 artificially reduced them by drawing down Alberta’s financial assets (savings) in excess of its debts by 67 per cent, from $39.4 billion in 2007/08 to $13 billion in 2014/15.

Even after the PCs’ mismanagement of public finances and the NDP’s first year of stimulus budgeting, Alberta had almost $4 billion in assets in excess of debt in 2015/16. In the current fiscal year, which ends on March 31, Alberta moved into a net debt position for the first time since 1998/99 because the NDP has chosen to maintain public services and jobs during the oil price downturn while continuing its plan to stimulate the economy with infrastructure investments.

In 2015, 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 was announced in 2015, legislated in 2016, and came into effect in January 2017). These measures were a reasonable start given the current weakness of the Alberta economy, but are insufficient to deal with the revenue problem that the NDP inherited.

A recent opinion poll released by the Parkland Institute shows Albertans are willing to pay a bit more income tax to enhance core services like health care, long-term care and education. The poll also shows Albertans believe high-income earners and large corporations should be paying higher taxes than they currently are. This means there is room for the government to introduce more progressivity in the personal income tax system.

Unfortunately, the NDP’s refusal to consider further tax increases in budgets 2016 and 2017 leaves Alberta with an inadequate plan for paying down the debt we have begun to incur. Although Alberta doesn’t have 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 Parkland Institute.

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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