Re­port warns of slow-mov­ing fis­cal dis­as­ter for Al­berta

With cur­rent trends, prov­ince’s eco­nomic poli­cies ‘un­sus­tain­able,’ econ­o­mist says

Calgary Herald - - CITY + REGION - KEITH GEREIN [email protected]­media.com twit­ter.com/ kei­thgerein

Think Al­berta’s pro­jected $8-bil­lion deficit is big ?

Try $40 bil­lion.

Though hard to be­lieve, that’s the planet of red ink the prov­ince could be drown­ing in just a lit­tle over 20 years from now.

The alarm­ing num­ber is fea­tured in a new pa­per by Univer­sity of Cal­gary econ­o­mist Trevor Tombe, who sees a “fis­cal gap” on the hori­zon that will prove im­pass­able with­out ma­jor struc­tural changes to the prov­ince’s fi­nances.

The gap is so large that it’s more ac­cu­rate to call it a canyon.

And it has Al­berta on the path to see its ra­tio of net debt to GDP rise to al­most 50 per cent by 2040, Tombe projects.

Cur­rently that ra­tio is eight per cent.

If debt reaches that point, in­ter­est pay­ments could ex­ceed $22 bil­lion an­nu­ally, which is roughly equiv­a­lent to the pro­vin­cial gov­ern­ment’s en­tire health bud­get.

The prov­ince would be forced to bor­row more and more money to pay the in­ter­est on money we’ve al­ready bor­rowed, which is like us­ing your Master­card to pay the over­due Visa bill.

Tombe’s pa­per is worth a read, but here’s a sim­ple over­view of why he be­lieves Al­berta is pointed at dis­as­ter.

The prov­ince’s costs are set to in­crease ex­ten­sively in the years ahead, largely be­cause the enor­mous baby boomer gen­er­a­tion is en­ter­ing a pe­riod of their lives when they will need ad­di­tional health ser­vices.

At the same time, those ag­ing baby boomers will be pay­ing less tax since most will no longer be work­ing.

The growth of roy­al­ties is ex­pected to slow and re­main vul­ner­a­ble to volatile fluc­tu­a­tions — see the cur­rent price slump for Western Cana­dian Se­lect oil — and it’s un­likely there will be any ma­jor sus­tained jumps in other es­tab­lished rev­enue sources.

Put those trends to­gether and it’s ob­vi­ous “Al­berta’s fis­cal poli­cies are un­sus­tain­able,” Tombe writes.

To be clear, Tombe doesn’t think $40-bil­lion deficits will nec­es­sar­ily play out, be­cause he ex­pects poli­cies will change. They’ll have to.

But the work must be­gin now, be­cause the chal­lenge only gets tougher if we wait, he says.

While Tombe’s work is valu­able as a scene-set­ter, Al­berta lead­ers have long known about the struc­tural chasm in the prov­ince’s fi­nances.

They know we have re­lied on un­sus­tain­ably high prices for a com­mod­ity that is pol­lut­ing the planet and des­tined to be­come ob­so­lete.

Calls for ac­tion have been fea­tured in count­less analy­ses and re­ports, and been ig­nored in favour of short-term goals.

A par­tic­u­lar wasted ef­fort that comes to mind was a 2011 gov­ern­ment re­port called Shap­ing Al­berta’s Fu­ture — co­in­ci­den­tally the same name as a po­lit­i­cal ac­tion com­mit­tee now run­ning anti-NDP ads.

The work of a blue-rib­bon panel led by for­mer fed­eral cabi­net min­is­ter David Emer­son, the re­port be­gan gath­er­ing dust on gov­ern­ment shelves al­most as soon as it was printed.

How do Al­berta’s two lead­ing par­ties plan to deal with the loom­ing chal­lenge?

United Con­ser­va­tive Party Leader Ja­son Ken­ney men­tioned Tombe’s work to jour­nal­ists Wed­nes­day, not­ing the prov­ince could re­turn to a bal­anced bud­get by 2021 through a com­bi­na­tion of zero spend­ing hikes and rea­son­able eco­nomic growth.

That re­sult is cer­tainly pos­si­ble, but Ken­ney did not ac­knowl­edge the part of the re­port that dis­cusses the years to come after, when the de­mo­graphic pres­sures re­ally start to bal­loon.

As Tombe’s anal­y­sis shows, the pro­jected fis­cal gap be­comes so large that it will be nearly im­pos­si­ble to tackle with spend­ing re­form alone. The prov­ince will also need to in­crease rev­enue, such as through tax hikes or the in­tro­duc­tion of a po­lit­i­cally un­pop­u­lar sales tax.

To date, Ken­ney’s party has been overly fo­cused on the ex­pen­di­ture side of the ledger. When it comes to rev­enue, the UCP plans to im­me­di­ately cut at least one in­come stream by elim­i­nat­ing the car­bon tax — and may re­duce other taxes as well — with no real ex­pla­na­tion of how to make up that fund­ing.

As for NDP Leader Rachel Not­ley, her gov­ern­ment has taken some ini­tial steps to diver­sify the econ­omy, which will hope­fully bring in new rev­enues. There have also been changes to in­come tax rates and the in­tro­duc­tion of the car­bon tax.

But those mea­sures are nowhere near enough to ad­dress the long-term prob­lem, not to men­tion the fact that gov­ern­ment spend­ing un­der the NDP has con­tin­ued to rise, al­beit at a slower rate in many ar­eas.

In short, the cur­rent track of the NDP won’t work ei­ther.

No one, Tombe in­cluded, is say­ing this is an easy nut to crack.

Just like cli­mate change, there is con­sid­er­able doubt whether hu­mans are hard–wired to deal with a slow mov­ing cri­sis.

To be­gin, we must ac­knowl­edge that the prob­lem ex­ists. We then must rec­og­nize that the great­est threat to ad­dress­ing the gap is our pol­i­tics, which has be­come far too tribal and near­sighted.

The last words of Tombe’s pa­per say it best.

“To date, Al­berta has kicked its fis­cal can down the road,” he writes. “Politi­cians blame one an­other and re­main fo­cused on short-term elec­toral gains. We can do bet­ter. We must.”

JEFF MCIN­TOSH /THE CANA­DIAN PRESS, FILE

A pa­per by Univer­sity of Cal­gary econ­o­mist Trevor Tombe says Al­berta in on a path to see its ra­tio of net debt to GDP rise to al­most 50 per cent by 2040 from eight per cent now.

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