Alberta’s spiral of debt
BNN, the business news channel, ran an online poll Tuesday before the latest fiscal update from Alberta: “Is Rachel Notley’s NDP government doing enough to reduce Alberta’s dependence on oil?” it asked.
But by the time provincial Finance Minister Joe Ceci released the latest numbers hours later, it was clear that the question’s premise, which the New Democratic Party happens to share — that Alberta needs to rely less on oil revenues — need not be taken as a given. There weren’t many bright spots in the financial update, but if one thing made it a bit less awful than it could have been, it was that oil and gas revenues are now projected to be considerably higher than the 2016 budget’s fairly gloomy outlook.
That’s largely due to the government increasing i ts projected average oil price from US$ 42 a barrel to US$ 45, helping to boost resource revenues by $ 744 million.
With West Texas Intermediate trading Tuesday at about US$47 a barrel, things could look even brighter for resource revenues, come the next fiscal update. The catch is that it still won’t even come close to making up for the red ink splashed around everywhere else, most plainly in the Notley government’s insistence on spending its way through the severest two- year economic contraction ever recorded in the province. And, less noticeably, in the plummeting of corporate tax revenues by nearly $900 million.
That’s a curious thing to see happening when resource revenues are projected to increase. After all, if Alberta is purportedly over- dependent on oil, and the government expects producers to get more money for that oil, why would companies pay less in taxes? And while the NDP raised the corporate tax rate from 10 to 12 per cent last summer, revenues are now projected to be about $500 million lower.
Ceci’s update didn’t shed much light on the discrepancy. It says the corporate tax loss is due mainly to the “impact of the weak econ- omy and the Wood Buffalo wildfire” around Fort McMurray (where, again, oilsands royalties are expected to be $ 500 million higher than initially projected). It’s possible the energy sector, worth about a third of Alberta’s gross domestic product, is doing that much better than every other business in the province, even though most of them — real estate, construction, financial services and retail — rise and fall with the fortunes of the oil and gas sector. But it’s also possible that Notley’s decision to hike corporate taxes may be doing what several economists have told her it would: give companies an incentive to relocate profits outside Alberta, to lower-taxed jurisdictions.
Ontario a nd Quebec aren’t well-known as tax havens, but after Notley hiked business taxes, both became cheaper places to park prof- its than Alberta. Any company with a subsidiary in one of them — which would include most major firms — can easily shift profits from one jurisdiction to another, wherever it can declare them at the lowest tax rate. Smaller firms without the luxury of mobile profits tend to be hit hardest by hikes to business taxes. Now, Notley’s NDP may be learning that governments can get hit pretty hard by them, too.
For a province that not long ago was as renowned for its business-friendly climate as for its fossil fuels, the sudden sapping of corporate tax revenues creates a precarious problem.
It’s clear that, despite a crash in investment and 50,000 jobs lost from the private sector in the last 12 months, the NDP government has not lost its nerve for heavy spending: the fiscal update projects $12 billion in new debt this year, leaving Alberta for the first time this century owing more than it has in savings accounts like the Heritage Fund. Almost all that new debt comes from the NDP’s fiscal plan and spending on capital projects, where it now outpaces, on a per- capita basis, even Ontario.
With corporate taxes fall- ing, and spending unabated, Alberta’s NDP is now racking up larger per- capita deficits than Ontario’s Liberals did in their hardest- core debt-binging days of the last recession, as the Fraser Institute’s Ben Eisen and Steve Lafleur note in Wednesday’s Financial Post comment section.
And as Ontarians well know, once governments slip under the debt waves, they find it all too easy to succumb, rather than thrash their way back to the surface. Alberta is now on the hook for more than $ 1 billion in debt interest pay- ments this year, which will only pull the province deeper into the inky abyss.
Ceci has made it clear the plan is to keep spending, no matter how badly revenues dry up, framing it, as he routinely does, as a choice between that or “reckless cuts to vital public services.” Such vital services now include laundry services, as taxpayers discovered last week when Postmedia revealed that the health ministry cancelled plans to outsource washing hospital linens that would have saved millions in equipment upgrades, because they would have also moved some public- sector jobs to a private firm.
In just the last year, Alberta added 47,000 publicsector workers to the payroll. What’s vital to the NDP is apparently not just refusing to cut spending, or merely hold the line on spending, but always to keep doing more of it, no matter how little money comes in.
Whether Notley’s government is doing enough to reduce Alberta’s dependence on oil isn’t the issue; it’s that her government’s spending is no longer dependent on anything.
ON HOOK FOR MORE THAN $1B IN DEBT INTEREST THIS YEAR.