Review assumptions behind Alberta’s fiscal woes

Rising expenditures, reliance on resource revenue are unsustainable

Albertans are facing serious fiscal challenges over the next decade. These challenges include the provincial government’s reliance on highly volatile and unpredictable non-renewable resource revenue and a high- cost government. Finance Minister Ron Liepert presents his budget on Feb. 9. As this budget will be more political than most, it may be helpful to review five underlying assumptions that drive the politics of Alberta budgetmaking.

Assumption 1: Albertans want first-class public services. This seems fairly evident judging by political platforms, as both government and opposition parties compete to maintain and enhance government services, notably health care and education. Since 1981, health and education as a percentage of program spending has grown from 44.8 per cent to 65.4 per cent in 2011. As soon as a political leader suggests changes in health-care delivery, as happened to Gary Mar, his or her political obituary is written.

But what are first-class services? This usually means “best in Canada,” which in turn means the highest funding per capita. Yet, in spite of having Canada’s highest per-capita spending, there remains a dearth of family doctors in Alberta. To those politicians and pundits demanding cuts, the question of where to cut usually is answered with vague talk of finding “efficiencies” in the $34-billion operating budget. The bottom line is an ever-expanding flow of public funds.

Assumption 2: Albertans resist tax increases. The low-tax orthodoxy, which reached its zenith under former premier Ed Stelmach (who eliminated health-care premiums and rolled back a liquor-tax increase), has been in ascendance since the early ’90s. This school of thought evolved across Canada as the provinces and federal government were learning the lesson that they could no longer go on borrowing indefinitely to spend. Interest payments on the debt were crippling government’s ability to fund core services, let alone new programs. With the capital markets threatening non-confidence in government borrowers, a period of austerity was ushered in, followed shortly afterward with the promise, and then the actualization, of lower personal and corporate income taxes. Any attempt to discuss new revenue sources, such as a harmonized sales tax, is viewed as an act of treason from all sides of the legislature. It is as if Albertans have a God-given right not to pay a sales tax. That said, lowering taxes is politically popular and provides a boost to the governing party.

Assumption 3: An anti-tax orthodoxy creates government reliance on the energy sector for revenue. Over the past 30 years energy resources, owned by the province on behalf of its citizens, have delivered from 15 to 50 per cent of provincial revenue. Other than spending on the necessary apparatus for regulating the oiland-gas industry (about $300 million annually) Albertans are given a huge tax break as the province sells off its resources. An expenditure of $300 million to take in an average of $6 billion over the past 30 years is a bonus payment that creates a conundrum for politicians. To the extent that government depends unduly on one particular source of revenue, that source — in this instance the energy sector — will legitimately want to be consulted about major provincial government policies. However, from a managerial point of view it makes good business sense to diversify revenue streams to reduce the influence of any one revenue stream and any one interest group.

The result has been that Albertans pay about $2,500 less than the average British Columbian in taxes. That difference equates to just over $9 billion in provincial revenue. With Alberta running a deficit, and Albertans wanting top-drawer services, it would still seem possible for Albertans to receive the high level of services they expect, but they would have to pay a greater portion of their incomes to sustain the current level of services. This seems reasonable given that in the private sector, customers expect to pay more for better goods and services.

Assumption 4: It is not in the interests of politicians to reduce program or capital spending. Politicians seek to be elected. Politicians maximize their chances through actions designed to win more votes from their constituents. In Alberta, with the exception of the Social Credit government in the late 1930s and in the early Klein years, public spending has steadily increased. Given population growth and the expansion of the economy and inflation, this is no surprise. Capital spending on schools, hospitals, roads and universities shows constituents what governments do for them. Particular spending programs

— especially for seniors, farmers and municipalities — are the fiscal instruments to underwrite election victories.

Assumption 5: Greater government reliance on bitumen royalties means the Alberta government depends increasingly on an expanding oilsands sector. The percentage of net non-renewable resource revenue coming from bitumen royalties has grown from about seven per cent in 2006 to nearly 45 per cent in 2011, demonstrating the importance of the oilsands sector as a source of funding for operating and capital programs. This reliance on growing oilsands production limits flexibility for governmental action in energy and environmental policy. While one may argue whether this is a good or bad thing, it is simply the result of long-term reliance on spending the non-renewable resource as opposed to saving more to build up a legacy fund.

But rest assured, steadily rising expenditures and Alberta’s reliance on resource revenue to pay a significant part of the bills is not sustainable without either an expenditure freeze or an increase in revenue sources. This reality will hit Alberta policy-makers after the election.