There used to be this saying in the Terrace Building, the old home of Alberta Treasury: “When things were good, they were very, very good. When things were bad, they were really, really bad.”
When oil prices are high in Alberta, all government revenues ride high: more employment brings more people and personal income tax; higher oil prices mean higher corporate profits and more corporate income taxes. Good times mean more car registrations, higher real estate values, more homes being built, more gas pumped; more alcohol and restaurant meals consumed; more trucks and luxury cars sold and more food and clothes sold in retail establishments.
And when prices fall, guess what? There’s lower economic activity, out-migration; lower real estate values and much lower government revenue. But wait. Can’t government just do what the oil industry does every downturn — lay off a whole bunch of consultants and contract workers and cut back investment?
Well, actually no. Our schools, hospitals, universities, municipal governments and social services work on an annual budget and expectations that these budgets will be maintained and normally increased with population growth and inflation. Governments also have collective agreements with nurses, teachers and government workers that normally carry over a number of years. In addition, government and its many emanations, like hospitals and universities, have huge physical infrastructures that require heat and light, and yes, maintenance — deferred or otherwise.
Our provincial government can exert some control over its environment. The government can control spending, subject to its contractual obligations, but it can’t control the price of oil. The government can control the tax rates and the number of taxes it sets, but it cannot control the rate of interest or the exchange rate of the Canadian dollar.
The provincial government can control the royalty rates and the pace of development of the oilsands, but it can’t control where and at what level the oil companies invest. The government can establishment a capital investment plan, but it can’t control population growth or investment returns to the Heritage Savings Trust Fund and other pension funds.
This fiscal dilemma has been with Alberta since the Leduc oil discovery. Governments since the Social Credit days have tended to shovel money out and keep taxes low when oil prices are high and restrain spending when prices are low.
For a very short time under Peter Lougheed, Ralph Klein and Ed Stelmach, some surpluses were saved. Now, as oil markets tank and energy shares plumb new depths, a sense of panic grows. But the faint sound of a drumbeat is heard. A sales tax is now being spoken of.
So what is to be done? The Alberta Taxpayer Protection Act, which was brought in by Ralph Klein in the late 1990s and is still on the books, requires a referendum to be held to institute a consumption tax. You might say fat chance with that, and I would agree. Small business doesn’t want the one-time hassle and labour sees this mistakenly as an assault on the poor. And more generally, why should the oil sector get off scot-free for not paying their “fair share?” All those are great questions. It would seem like suicide for any politician to initiate the debate.
Now the Tories, “under new management,” will face their hardest task. In the next couple of months, behind closed doors, Treasury Board, caucus and senior officials will debate approaches to managing a significant decline in revenue. This decline must be stickhandled at the same time that public expectations have been heightened with spending promises initiated through a leadership contest.
Without considering all types of revenue sources — including a consumption tax, or, heaven forbid, a carbon tax — Albertans and public-sector employees will again be facing unpredictable fluctuations in public services and employment. It is deeply unfortunate that long-term, prudent revenue and expenditure management processes have not been a focus of the Alberta government over the past decade.
Maybe we should just throw in the towel and hold a referendum, just for the fun of it!
Bob Ascah is a fellow at the Institute for Public Economics at the University of Alberta.