Al­berta’s red ink flood trig­gers fed­eral alarm

Calgary Herald - - FRONT PAGE - CHRIS VARCOE

News flash: Al­berta’s fi­nan­cial poli­cies are “not sus­tain­able” over the long term.

That blunt as­sess­ment doesn’t come from par­ti­san op­po­si­tion crit­ics, num­ber-crunch­ing economists or opin­ion­ated busy­bod­ies like my­self who have warned the Not­ley gov­ern­ment of a bud­get snow­ball headed to­ward the prov­ince.

In­stead, the new cri­tique comes from an­other cor­ner: the in­de­pen­dent Par­lia­men­tary Bud­get Of­fi­cer in Ottawa.

Es­sen­tially, Al­berta is spend­ing way too much money on pro­grams while col­lect­ing far too lit­tle rev­enue to cover the short­fall.

It has led to back-to-back $10-bil­lion bud­get deficits, and the prospect of $16.9 bil­lion in ad­di­tional red ink pro­jected for the next two years.

In a re­port re­leased last week, the PBO reviewed the fi­nances of the fed­eral gov­ern­ment, as well as each prov­ince (for the first time) to eval­u­ate the sus­tain­abil­ity of their cur­rent fis­cal poli­cies.

The idea is to en­sure gov­ern­ment debt lev­els don’t grow con­tin­u­ously as a share of the over­all econ­omy.

If the net debt-to-GDP lev­els ex­pand, that cre­ates a “fis­cal gap,” ac­cord­ing to the PBO of­fice, which was set up to pro­vide anal­y­sis to Par­lia­ment on the state of Canada’s fi­nances.

The study’s as­sess­ment on fed­eral fi­nances is rel­a­tively be­nign, pro­ject­ing Canada’s net debt will be elim­i­nated in just over four decades. The re­port on Al­berta is more like a warn­ing siren go­ing off. “Cur­rent fis­cal pol­icy in Al­berta is not sus­tain­able over the long term,” it states.

“PBO es­ti­mates that per­ma­nent tax in­creases, or spend­ing re­duc­tions, amount­ing to 4.6 per cent of pro­vin­cial GDP ($14.1 bil­lion in cur­rent dol­lars) would be re­quired to achieve fis­cal sus­tain­abil­ity.”

In sim­ple lan­guage, Al­berta would need to per­ma­nently in­crease its tax bur­den by 25 per cent or slash pro­gram spend­ing by 20 per cent — or im­ple­ment a com­bi­na­tion of the two to the tune of $14 bil­lion — to be­come fi­nan­cially sus­tain­able.

“This is def­i­nitely a huge chal­lenge for Al­berta,” said Mostafa Askari, as­sis­tant Par­lia­men­tary Bud­get Of­fi­cer.

“That doesn’t mean the only so­lu­tion in Al­berta is (to) tax more. I think it has to come from both sides. There has to be recog­ni­tion that the sit­u­a­tion is not sus­tain­able. So some­thing has to be done.”

And that’s key. Some­thing must be done.

Askari notes the fig­ures aren’t fore­casts of what will hap­pen. It’s not a crys­tal ball fore­telling a bleak fu­ture.

In­stead, it’s an ex­am­i­na­tion of cur­rent fis­cal poli­cies to see what would un­fold if no changes were made in the long run, af­ter fac­tor­ing in the eco­nomic con­se­quences of Canada’s ag­ing pop­u­la­tion.

The study in­cludes all sub­na­tional gov­ern­ment fi­nances for each prov­ince, such as cities, mu­nic­i­pal­i­ties and Abo­rig­i­nal gov­ern­ments. The bulk of the spend­ing in Al­berta — $55 bil­lion in this year’s bud­get — is driven by the gov­ern­ment in Ed­mon­ton.

The study found Al­berta has the sec­ond-largest fi­nan­cial gap among the prov­inces, be­hind only New­found­land and Labrador.

Al­berta is re­spon­si­ble for 92 per cent of the fis­cal gap among all of the pro­vin­cial and ter­ri­to­rial gov­ern­ments com­bined, the re­port adds.

“Clearly, if there were ever a red warn­ing light flash­ing on the dash­board that some­thing is go­ing wrong, that (fig­ure) points to it in a se­vere way,” said United Con­ser­va­tive Party MLA Ric McIver.

Even though Al­berta is pro­jected to have the fastest-pop­u­la­tion growth in Canada and en­joy fu­ture eco­nomic ex­pan­sion in the years to come, tough medicine will be re­quired to bridge a fis­cal chasm that’s as wide as the Snake River Canyon.

Univer­sity of Calgary econ­o­mist Trevor Tombe points out the PBO anal­y­sis doesn’t forecast fu­ture oil prices or fac­tor in the im­pact in­creased pe­tro­leum pro­duc­tion will have on Al­berta’s fu­ture fi­nances.

As Al­ber­tans know only too well, a re­turn to oil prices of US$80 a bar­rel would have pro­found im­pli­ca­tions on the bot­tom line.

But by its very na­ture, re­source rev­enue is un­pre­dictable. This is why Al­berta gov­ern­ments for the past decade have only made bud­get prob­lems worse by bank­ing on volatile roy­al­ties, while over­spend­ing and un­der-tax­ing.

By next year, Al­berta will col­lect at least $8.7-bil­lion less in taxes and car­bon charges than any other prov­ince. It’s a tax ad­van­tage, to be sure, but not a sus­tain­able one.

Tombe be­lieves mod­est changes in gov­ern­ment spend­ing can avoid some of the neg­a­tive out­comes the re­port is pro­ject­ing, such as the debt-to-GDP ra­tio climb­ing from 27 per cent this year to 99 per cent by 2040, or pub­lic debt charges ris­ing from $1.3 bil­lion to $10 bil­lion within a decade.

“What Al­ber­tans need to take out of this is some dif­fi­cult choices need to be made,” he said.

“The first step to re­cov­ery is to ad­mit we have a prob­lem and a lot of peo­ple don’t yet fully ap­pre­ci­ate the fis­cal sit­u­a­tion Al­berta is in.”

Fi­nance Min­is­ter Joe Ceci has promised the $10.5-bil­lion deficit this year will be cut by a third by 2021, and that Al­berta will re­turn to a bal­anced bud­get by 2023-24.

The min­is­ter wasn’t avail­able this week to com­ment on the BPO re­port, is­su­ing a vague state­ment that Al­berta’s econ­omy is re­cov­er­ing and the gov­ern­ment is com­mit­ted to find­ing $400 mil­lion in sav­ings this year.

Min­istry of­fi­cials point out the PBO re­port used last year’s oil price crash and Al­berta’s re­ces­sion as the prov­ince’s eco­nomic base­line, and sug­gest eco­nomic growth now un­der­way will al­ter the fu­ture.

Yet, there’s no de­tailed plan to get the prov­ince back into a fis­cally sus­tain­able po­si­tion.

The deficit snow­ball, how­ever, keeps on rolling, pick­ing up speed as it’s headed to­ward Al­berta.

Mostafa Askari


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