With oil revenues dropping, the Alberta treasury will need to cut spending or raise revenues
With oil prices plunging and OPEC unable to cut production, Alberta’s Minister of Finance, Robin Campbell, presented the second quarter update on Wednesday, painting a picture that seems brighter than one would have expected.
Alberta’s operating surplus by March 31, 2015 is expected to be $2.7-billion, a $200-million improvement over the fiscal year 2013-14. Revenues are expected to be $45-billion, pretty close to the previous year and operating expenses are expected to decline by about $900-million.
So far so good.
But Alberta’s fiscal picture is not so healthy once accounting for capital spending. A better way to calculate a true deficit is see how net financial assets (assets less liabilities) change from one year to the next, a measure more consistent with day-to-day living. After all, if both operating and capital spending exceed revenues, a household or business will need to sell assets or borrow money to cover the shortfall. This approach is more consistent with federal budgetary practices since capital spending is included as part of expenditures when the deficit is calculated.
This preferred financial measure suggests that the Alberta’s overall deficit is projected to be $2.7-billion in 2014-15 fiscal year, almost double the previous year’s $1.4-billion. In other words, Alberta is still bleeding its saving accounts.
Despite holding the line on operational spending, Alberta is clearly facing the headwinds of a tougher global economy. In the first six months, average oil price realizations have been better than the previous year. However, the 25% plunge in global prices since July – and likely more in the near term – is eroding revenues. Net financial assets could thus plummet more. If the Prentice government wishes to halt its financial deficit, it will need to cut spending or increase taxes.
Tax increases are anathema in Alberta, despite musings of a hike in personal tax on individuals perhaps earning more than $150,000. Unfortunately, there is not much money in a tax hike of this type given the potential of losing significant share of the tax base. If Alberta’s personal tax mimics other provinces, tax refugees now living in Alberta might shift income internationally or move elsewhere.
If taxes are to be raised, far better to increase consumption taxes or user fees to fund public services. Or, maybe that 2% Alberta HST piggybacked on the federal GST looks pretty enticing if education and health spending is to be maintained.
The alternative would be to increase borrowing to fund infrastructure spending, which is a typical response to avoid tax increases or spending cuts. Politicians of all stripes have used debt-financed infrastructure as an excuse for bigger deficits, arguing that infrastructure benefits future populations, not just the current one. With debt finance, future taxpayers pay for infrastructure costs.
The logic is fair enough but it does not tell us how much infrastructure should be financed by debt. Bev Dahlby at a recent University of Calgary School of Public Policy conference on budgeting made a first pass at answering this question. To smooth tax burdens over time, he suggests that Alberta fund only 20% of its infrastructure spending by debt.
If Dahlby is correct, the current policy in Alberta and other provinces is wrong. It is pushing debt obligations unfairly on future non-voting taxpayers who cannot influence public decisions through the ballot box today.
There might be a way of this dilemma. More infrastructure spending could be financed by debt if governments create a revenue stream to help cover operational costs and interest expenses. Tolls could fund roads, highways and bridges. Indeed, tolling is a sensible for a variety of reasons. By varying the toll according to traffic flows, congestion can be reduced. So can pollution as drivers achieve better energy efficiency.
Urban areas can be better planned since households make better decisions as to whether they wish to live close to work or further away. Without paying for commuting costs, people live further away to avoid higher housing costs near a centre. User pricing would also help attract private equity and pension plan funds to design, construct and operate capital projects, since a revenue stream would be created to help cover costs.
Canadians in large cities, especially the Greater Toronto Area, are fed up with traffic congestion and they want their governments to address the problem. No doubt the superior policy is to introduce pricing for some infrastructure to better manage resources. Obviously, voters would prefer to see someone else pay for these costs, whether federal transfers (paid by residents in all provinces) or debt obligations foisted on future generations. That has not worked in the past – a new approach incorporating more reliance on user fees is needed.
Alberta’s problems are not much different than other provinces’, despite its richness in resources. It has a deficit. It needs infrastructure. There is an answer that is patently obvious to break the logjam.
Jack M. Mintz is the Palmer Chair, School of Public Policy, University of Calgary