You can’t help admiring Jim Prentice, the new Premier of Alberta, for singly turning around the fortunes of the Alberta PC party in just four short months. Ridding an image of entitlement and winning four ridings, he has now almost vanquished opposition from the right.
His big test is coming its way when the Alberta budget is presented this spring. It is one thing to reverse bad policies inherited from the Redford government. It is another to make tough decisions with a marked decline in oil prices.
Just in November, the Alberta government forecasted that net financial assets – the best measure of deficits – are expected fall by $2.7 billion as of March 2015. This is different than the $900 million surplus reported by the Alberta government, which includes the change in non-income producing public capital.
I can’t think of any government in the world that calculates a surplus in this way. Some governments will report an operational deficit by deducting depreciation of capital rather than capital expenditures. However, they also report their net financial debt, which tells the voter how much debt is rising when current and capital spending exceed revenues. One thing that Premier Prentice can do is clean up this confusing mess in public reporting.
With a further decline of about $20 per barrel for the current fiscal year, I estimate oil royalties to be about $0.5 billion lower for the 2014-15 year. Corporate, personal and excise tax revenues could also decline if workers are laid off. Of course, the impact will be somewhat muted since lower gasoline prices will buoy up other parts of the Alberta economy.
However, for 2015-16, a prudent price forecast of $60 per barrel – instead of close to $88 dollars in 2014-15 – would certainly mean a large deficit, potentially rising closer to $5.7 billion (as measured by the decline in net financial assets). Mr. Prentice’s options are pretty simple: Cut spending, increase taxes or borrow more from markets.
Prentice will need to achieve a fine balance among competing interests. With the demolition of the political opposition, he has more room to shift to the left and take on some tax increases. However, to attract the new Wildrose MLAs crossovers, he now deals with a stronger political right in the party to support spending reductions.
Certainly, there is room for some spending cuts by driving more efficiency in public services especially health care, which accounts for roughly 40% of the program budget. Next to Newfoundland Labrador, Alberta is the largest per capita spender on health care. Yet, it shows mediocre results among provinces in terms of the quality of services, as pointed out by the Canadian Institute of Health Information. Costs could be reduced without hurting services by increased use of primary care, increased competitive practices among suppliers in the public health care system, and new approaches to drug pricing.
Prentice will need to achieve a fine balance among competing interests.
Revenues could be increased as well. The smartest would be to enter into a sales tax harmonized with the GST, bumping the rate from five to seven per cent and keeping the two points as an Alberta tax – yielding $2 billion in revenues. While the Alberta sales tax is the smartest tax policy option, the Prentice government has already dismissed it. An enhanced carbon levy could be considered as well as higher excise taxes on fuel, alcohol and tobacco. Also, road tolling and other user fees such as post-secondary education tuition fees could be a possible source of new revenue, which would have significant long-term benefits.
And, of course, an increased personal tax rate on high-income Albertans is attractive politically. While it is tempting to tax the rich, there is little money in doing so. For example, taking recent work done by Finance Canada, a one-point increase in the personal income tax rate for incomes above $150,000 would only yield $170 million. Given that many wealthy Canadians have moved to Alberta for tax reasons, the long-run impact could be much less revenue, if not losing money altogether.
The trouble with personal tax increases, even on the rich, is that it will hamper economic growth. Given that the Alberta economy is highly dependent on skilled labour and has been diversifying its economy in part due to its tax advantage, higher taxes is not a well-timed option. Tax reform with reductions in the most growth-deterring taxes in favour of less harmful ones would make sense. But that does not solve the government’s revenue problem.
This leaves the third option – more debt. Future voters don’t matter so why not do what Getty and Stelmach governments did when faced with a large deficit – just hope for resource revenues to come back? This is a failing strategy by providing no long-run solutions.
If the Prentice government were to rely on more debt finance, it could at least put in place some reforms in the interest of promising a better future for Albertans. Infrastructure spending qualifies in this sense but there are other policies such as reforming social services and education that would help the province improve its economic climate.
Indeed, it would be good if the Prentice government could establish a set of policies to rid the Alberta government of its roller coaster spending practices – increasing spending during booms and cutting services in busts. A new fiscal planning model itself would be a boost to better public sector decision-making in the future.
Jack M. Mintz is the Palmer Chair, School of Public Policy, University of Calgary.