It won’t be easy, but Alberta can achieve fiscal sustainability

Slow spending and smart policies help, write Janice MacKinnon and Jack Mintz.

Tackling Alberta’s ongoing deficits, rising debt and increased interest costs, which cloud the province’s future, requires looking beyond black-and-white scenarios of either continuing to increase spending or imposing austerity and drastic cuts.

The Alberta government should change its path by accepting two principles to move away from its unsustainable fiscal plan. First, spending can be constrained over time without hurting frontline services, as we explain below. Second, smart spending, tax and regulatory policies, some of which has been pursued in the past, can boost growth and achieve fiscal sustainability.

The 2017-18 Alberta budget projects that by 2020, Alberta’s debt will be $70 billion, which is $16,500 for every person in the province.

However, the budget is based on optimistic assumptions about the price of oil — if oil fails to rise to US$68 per barrel by 2019-20, then the debt will be billions higher.

Acting immediately to tackle the yawning gap between spending and revenue is imperative, and looking to the three other large provinces (Ontario, Quebec and British Columbia) can provide perspective and solutions.

Relative to the other large provinces, Alberta is a big spender. The average spending level of the three other large provinces is $9,233 per capita in 2017-18, compared to Alberta’s $12,409 per capita, meaning that Alberta’s per capita spending is $3,176 higher.

If Alberta begins to reduce its spending to levels half closer to the average of comparable provinces, it could eventually reduce its spending by $6.6 billion annu- ally through better management and priority setting.

One area where spending could be reduced is infrastructure, where spending should be based on demands and population size, not on GDP, which fluctuates dramatically in Alberta. On a percapita basis, public infrastructure spending in Alberta by all levels of government was substantially higher than comparable provinces from 2010 to 2015.

Also, Alberta’s basic infrastructure is generally not as old as in the other large provinces. If Alberta were to spend the same infrastructure per capita as the average of these provinces, it could save $4.6 billion over three years. Also, public sector compensation in Alberta is higher than in comparable provinces, which has led other provinces to complain about their inability to compete. A common misconception is that governments cannot impose salary settlements on unionized employees. The experience of Nova Scotia and Manitoba shows that public-sector salary mandates can be established and enforced, so long as they respect the collective bargaining process.

If the government were to follow the process established by these provinces, it could more closely align Alberta’s public-sector compensation with comparable provinces and save $1.5 billion over three years.

Savings can also be achieved by restructuring programs, such as health care, to get more value for the dollars spent and by improving procurement policies for clinics, drugs and medical supplies. In health care, Alberta spends $915 more per capita than the average of the other three large provinces, which means spending $3.8 billion more annually.

Even though Ontario and British Columbia spend less on health care and have older and less healthy populations, their health outcomes are better than Alberta’s.

Adopting some of these provinces’ common-sense changes would produce significant savings.

Government revenue could also be increased by promoting economic development.

By increasing taxes on higher income earners and larger corporations, increasing the minimum wage, and imposing carbon taxes and regulations, the Alberta government is signalling that investing in the province is difficult and costly.

Tax reform can also encourage economic growth if levies that are most harmful to the economy are replaced by other less damaging ones. Rather than using carbon tax revenue for subsidies, it should be used to promote economic growth and tax reform.

Changes like those mentioned above, along with a longer-term plan to balance the budget with specific deficit targets for each year, will put Alberta’s budget on a fiscally sustainable trajectory.