National Post (National Edition)
Our picture of fiscal health faces future of pain
“Alberta’s fiscal policies are unsustainable.” With this brusque, portentous declaration, University of Calgary economist Trevor Tombe commences his new overview of Alberta government finances. I promised myself I wouldn’t make jokes about the professor erecting a Tombe-stone for the province, but his opening sentence does have the chilling quality of an epitaph.
Things are not quite as desperate as all that. Tombe takes much care to emphasize that his analysis of Alberta finances is not a prediction. When he calls the provincial government’s spending habits “unsustainable” he means that, given reasonable assumptions about the future, current tax sources and rates will not be enough to prevent the treasury from entering a spiral of increasing deficits and increasing debt-servicing costs. Alberta, in other words, has a large presumptive “fiscal gap.”
The NDP government’s 2018 provincial budget promised a “path to balance” that will see the current run of huge deficits reduced to zero by 2023. The problem, as Tombe sees it, is that other pressures on the budget will continue to build after that. The biggest is an aging population. Health-care costs are bound to outpace inflation and population growth as the worker-to-old-coot ratio diminishes.
Unless there is a windfall, Alberta cannot really hope to preserve its combination of generous public spending and low taxes. And you’ve probably read some of our innumerable stories about Alberta experiencing the opposite of a windfall right now — receiving, by some estimates, virtually no dollar value at all from the bitumen being mined up north around Fort Mcmurray.
All of this is familiar doctrine. So what’s new? Tombe provides a firm estimate of the exact size of the fiscal gap, and puts it in historical context. He thinks that to close the gap through the year 2040, Alberta would need to increase government revenues or cut its program spending immediately by an amount equal to 2.7 per cent of GDP. “For perspective,” the professor ads, “that means cutting government expenditures by $1 out of every $6 spent or introducing a 10 per cent sales tax.”
Either choice is bound to make one wince. (Albertans aren’t keen on the idea of an any-per cent-at-all sales tax.) But it is not, after all, an either-or choice. Tombe spends a lot of time making this point — that the gap can be handled by a mix of smooth tax increases and slow but steady spending cuts.
He mentions only in passing that Alberta has done this sort of thing before. Ralph Klein’s feverish costcutting shrank the government’s program expenditures from 21 per cent of Alberta GDP to 13 per cent in three years. The fiscal gap could be fully addressed by spending cuts only onethird that size.
There are exactly two kinds of Albertan. There’s the kind whose instinctive reaction to this news will be to say “Yee-haw! Give ‘er!” And there’s the kind that will turn white as a sheet at the idea of program spending cuts even one-third as severe as those of the early Klein years.
It is hard to say which kind would win in an electoral fight nowadays; but the truth is that Klein trimmed an awful lot of low-hanging fruit, and spending cuts would be more difficult and more painful now, dollar for dollar. The aging of the Alberta population (or anyone’s) inflates the cost of elder care and health even as it turns taxpayers into pensioners. Health care alone already consumes close to 90 per cent of all the tax paid to the Alberta government in a year.
Tombe’s paper is useful for outlining the size of the problem, and should help set the agenda for Alberta’s 2019 general election. But it is also interesting to scrutinize the assumptions involved in building a model of the Alberta budget. (It is also a little annoying that the work is being left to the academy.) One finds oneself thumbing through Tombe’s article for a metaphorical magic wand or spell. The Oil Boom Fairy might always arrive again, as he observes, and she does have the ability to make nonsense of his intimidating numbers.
His fiscal gap estimate also assumes no special increase in federal government transfers to provinces. Alberta’s treasury, assessed against the background of its GDP, is still healthier than those of her siblings: Tombe’s scary baseline scenario would actually see Alberta’s debt-to-gdp level hit those of today’s Quebec only in 2040. This could mean that the federal government will have to increase transfers in order to bail out Alberta’s neighbours before Alberta’s own need becomes too desperate.
But counting on Ottawa to take politically selfless budget action is probably just as foolish as dreaming of $200 oil.