ALBERTA BUDGET IS SHORT ON LONG-TERM THINKING
Province’s commitment to orthodoxy is holding it back, Kevin Carmichael argues.
Alberta Finance Minister Travis Toews protested too much.
“This government is not driven by dogma,” he said near the end of the first quarter of his 4,500word budget speech on Thursday. “We are pragmatic about economic intervention, not doctrinaire.”
By way of evidence, Toews offered the United Conservative government’s decision to create the Alberta Indigenous Opportunities Corp. and seed it with $1 billion to help First Nations “become partners in energy and resource development.”
He also padded his interventionist-if-necessary credentials by highlighting the $1.9 billion he anticipates extracting from large emitters to fund the development of green technology, and the $200 million he set aside for skills development and the commercialization of research.
But if the goal of the digression was to showcase Premier Jason Kenney’s government as open-minded and flexible, it was as convincing as Clark Kent hiding his true identity behind a pair of glasses. The government’s commitment to orthodoxy is impressive. The risk is that it freezes Alberta in time as the rest of the world moves on.
The province’s budget is a tribute to the doctrine of low taxes and balanced budgets. Toews aims to erase a $9-billion shortfall in four years almost entirely by cutting spending, while implementing a big corporate tax cut and crossing his fingers that oil prices hold steady.
And while the finance minister speaks more softly than his boss, he is no less dogmatic when it comes to airing regional grievances. Toews told reporters that he doubted there was a bridge or school “anywhere in Canada” that “hasn’t benefited from Alberta energy.” He said he plans to agitate for changes to the equalization program so that it would come to the province’s aid when times are tough.
If he’s serious about doing a deal on equalization, he might want to stop behaving like a disgruntled benefactor, lest his counterparts point out how much aid could be generated by charging a sales tax.
Toews’s budget is replete with examples of how Alberta’s spending exceeds the average of Ontario, British Columbia, and Quebec, yet says nothing about how little revenue the province seeks to collect from the country’s richest per-capita population. He did introduce a stealth increase by proposing to temporarily stop marking the basic income-tax deduction to inflation, but this would change little, as the finance department foresees taxes rising to 45 per cent of total revenue from 44 per cent currently.
“Even if program spending growth is dramatically cut, the government must find a new source of stable revenues,” David Dodge, the former Bank of Canada governor, said in a report on provincial finances earlier this year published by Bennett Jones, the law firm where he now works as an adviser. “A provincial GST could help fill the gap without harming Alberta’s competitive position.”
Alberta’s spending needed a trim to reflect the decline in oil royalties. Public debt charges surged 17 per cent between 2010 and 2018, according to Dodge and his co-author, Richard Dion. That was from a very low base, but still out of step with what was going on in the rest of the country. The second-biggest increase in public debt charges over that period was three per cent in Manitoba.
“Tough economic times require tough policy decisions,” said Sébastien Lavoie, chief economist at Laurentian Bank Securities. “The bottom line for bond investors is that the UCP government can restore Alberta’s public finances, as long as the budget proposals are efficiently put into action.”
Toews plans to drop the provincial tax on corporate income to eight per cent in 2022 from 11 per cent currently, restoring the “Alberta advantage.” The combined federal and provincial rate would be 23 per cent, compared with 27 per cent in British Columbia, 27 per cent in nearby Oregon, and 28 per cent in California. Assuming other jurisdictions resist the urge to race Alberta to the bottom, there will be only a few places in North America where companies pay lower rates on profits.
“The weight of historical evidence overwhelmingly shows that when we improve our corporate tax advantage, our provincial (gross domestic product) goes up and our share of national GDP increases,” Toews said in his budget speech.
If only it were so simple.
The budget matches the minister’s confidence in the power of tax cuts, predicting economic growth of 2.7 per cent in 2020, much faster than the average forecast of nine private forecasters, which was 2.1 per cent. The technocrats appear less certain that lower rates will pay for themselves, however, stating that a corporate-tax cut will provide companies a fillip of $4.7 billion, but at a “net fiscal cost” of $2.4 billion.
Relatively high-tax Quebec will lead the country in economic growth this year, according to Bank of Nova Scotia, a spot normally held in recent years by high-tax British Columbia. Confiscatory tax rates haven’t stopped California and Oregon from become two of the wealthiest places on the planet. One thing all of those places have in common is booming technology industries. Alberta should be in their league, but it’s not, mostly because it’s waiting for a catalyst to bring all of its intellectual property, entrepreneurs and capital together.
It’s not obvious that one of the lowest corporate rates in North America will do that. Toews scrapped five tax credits aimed at helping startups achieve scale. Purists will applaud that decision. However, a less doctrinaire finance minister might have left them in place to enable a shift away from oil. But Toews made clear this week that a balanced budget matters more than to him than diversifying the economy.
“Reducing the corporate tax does not provide any financial advantage before you are profitable, which is true of most new ventures in the initial years,” said Robert Price, founder of Calgary-based Bōde, a digital real-estate company. “What is the bigger picture approach to successful economic diversification? The UCP tax change is short-term thinking.”
Even if program spending growth is dramatically cut, the government must find a new source of stable revenues.