Alberta made history yesterday for all the wrong reasons, with an announced budget deficit of $6.1 billion. Trends have been pointing towards this for some time and this latest deficit in part has its roots in the low-tax, high-spending policies of the Stelmach and Redford governments. This view echoes a Fraser Institute report that blames rampant spending growth rather than low oil prices for Alberta’s current fiscal woes. That report points out that the province has run seven fiscal deficits over the past eight years, with spending over the past decade growing 98.3%, compared to population growth and inflation at 52.1% and economic growth at 88.6%. On an annual basis, program spending grew at an average rate of 7.3% yearly, while population growth and inflation averaged 4.7% and economic growth averaged 6.9%, respectively and yearly.
To be sure, low oil prices are putting downward pressure on the revenue side of the equation, and with Alberta’s NDP government loathe to cut spending, the deficit is likely to persist for some time. But the report makes clear that government revenue, although down 10.4% for 2015/16, is still 15.6% higher than pre-recession 2007/08 levels. The causal link between low oil prices and the deficit are thus overstated. Indeed, the report concludes that had previous governments elected to peg spending growth to either population growth and inflation or alternatively to economic growth, Alberta would have a budget surplus projected at $4.4 billion or $1.9 billion, depending on the scenario and assuming low commodity prices.
The report is absolutely correct in absolving the current provincial government of the blame for the lead up to this state of affairs, as this is a problem years in the making. But it points out that the current government is on track to exacerbate the problem. Under its watch, the 2015/16 budget deficit has grown over past projections, spurred in large part by planned increases in spending.
Of course, Finance Minister Joe Ceci has promised to balance the budget by 2020, a year later than previously announced, due in part to the squeeze on revenue growth. The reasons for this are understandable. For now, Alberta’s assets exceed its liabilities. But deficit spending will move the province to a net debt position. Currently, the deficit represents a modest 1.8% of GDP, so the problem can still be tackled in its infancy. But if the deficits are not reined in, and the province’s debt grows to 15% of GDP, its pristine AAA credit rating will be at risk, as Wild Rose Leader Brian Jean recently warned. If that happens, Alberta will lose its access to cheap credit. As it is, debt is projected to grow to $36.6 billion by 2017/18, although there is talk of legislatively capping spending to keep debt below the 15% threshold. Politically, the NDP would be vulnerable to attack if it fails to rein in the deficit or if it presides over a credit downgrade; this vulnerability would only be compounded in a province that voted overwhelmingly conservative in the recent federal election.
While the stated endgame policy makes sense, the means chosen reveal the government’s ideological inclinations. The government does not intend to cut health, education, and human services spending. It has also taken civil service job cuts off the table. To balance out higher expenses, the government has abolished the flat income tax in favour of incrementally increased personal taxes on “high earners,” up to 15%. Likewise, it has raised corporate income tax from 10% to 12%. Further down the line, higher oil & gas royalties and carbon taxes are likely. No matter how its sliced, the once vaunted Alberta Advantage increasingly sounds like a quaint throwback to more prosperous times.
Effectively, the government has simply reverted to policies favouring its own base in the public sector. Alberta has the third highest per capita public spending in Canada, at almost $12,000 per head. Only Saskatchewan and Newfoundland spend more. Fully $23 billion of public spending is attributable to labour costs, compared to a previously projected budget of $49.4 billion. Alberta’s high per capita public spending is thus a reflection of high labour costs, although public employees command only a modest 4% wage premium over the private sector. Cost savings are possible, but given the already modest premiums public employees command and labour costs’ substantial proportion of the budget, it is hard to see how this can be accomplished without impacting service.
Since doing the same with less looks elusive, the government appears content to simply shield public sector employees from the downturn. In Minister Ceci’s own words, “[the budget will] ensure people aren’t left in the lurch when times are bad…”
It would be more accurate to say that it will ensure only some people “aren’t left in the lurch” since the government’s spending priorities and tax policies make clear that many in the private sector are effectively on their own. Indeed, private sector employment is not shielded from cuts; over the past year, 10,000 jobs have been cut, and the resource, manufacturing, and professional services sectors have seen cuts amounting to 9%, 7%, and 6%.
The government is convinced that it can squeeze the private sector to balance its budget, under the assumption that the costs of doing so will be modest. But one of the first things private employers do when faced with costly regulations and taxes is cut staff. Oil prices are low, and it is far from certain whether they have bottomed out. WTI has hovered on the wrong side of $45 per bbl for some time. Carbon taxes, higher royalties, and a host of other hostile government policies, such as lack of support for pipelines, will only hurt investment and job growth. Given depressed earnings, to go ahead with all these policies is to squeeze blood from stone. The ultimate losers will be those on the receiving end of private sector layoffs.
The NDP has a willful tendency to view the private sector’s struggles with skepticism. It also has a propensity to overestimate how much taxation and regulation the private sector can take before overall economic health is undermined. The result is a less-than-friendly business atmosphere. Given the NDP’s hand in creating this, it really calls into question its commitment to equity and fairness when it protects its own core constituents at the expense of those on the receiving end of its tax policies.