Sadly, the budget glass is half empty

The United Conservative Party won the election with a promise to balance the budget in its first term.  In its first year, government spent about $58 billion and took in $46 billion – not an auspicious start! 

Before the pandemic, it laid out a path to balance the budget. It forecast a 2020 deficit of $6.8 billion. According to the plan; in 2021, the deficit would be reduced to $2.7 billion. And a year later, a modest surplus.

COVID-19 threw those plans out the window.! The Finance Minister now estimates revenue to be $38 billion, having plunged by $11.5 billion. And $10 billion of that is transfers from the feds. 

Let that sink in! Wealthy Alberta managed to raise only half of the revenue needed to pay the bills! 

The result will be a record deficit of $24.2 billion.  The accumulated net debt now stands at about $100 billion.

How can Alberta fill the holes in its budget?

There are the standard ingredients:

  • Reduce program spending
  • Grow the economy and taxes
  • Hope for a rebound in energy royalty revenue and capital investment
  • Hope for increased federal help

Cutting government costs – The Holy Grail of cost cutting is to reduce health care costs.  In the midst of a pandemic, attempts at major structural change in health care delivery falls on very stony ground.  The UCP is struggling to overcome a poor start at reducing doctors’ pay.  

Service cuts in education don’t offer much in the way of opportunities either. Government infrastructure spending is an important job creation buffer.  The smaller departments have already taken significant reductions, so there is only a bit of loose change to be found there. 

50% of governments’ cost are salaries. After a prolonged period with no wage growth, the public sector unions won’t be easily persuaded to take cuts when corporate tax reductions are a central government strategy. 

Grow and Diversify the economy – The province forecasts an economic rebound in 2021 – perhaps a 5% increase in GDP.  It pins its hopes on business tax reductions to stimulate growth.

It further expects regulatory changes and a series of sector strategies will help diversify the economic base.  The diversification agenda has languished for years.  Each time a diversification strategy is proposed it is defeated by conservative orthodoxy and a rebound in energy that is too appealing to forego. 

Another energy boom – The government has spent a lot of money and enormous political capital to support the energy sector.  Corporate tax breaks, reduced municipal taxes, suspended environmental regulations, investments in pipelines are only a partial list. These measures are aimed at keeping the energy sector from further decline.  

The expectation is for better days ahead with the completion of Keystone XL to the US Gulf Coast, TMX to Vancouver tidewater and Enbridge Line 3 to Minnesota. And as demand increases, this might persuade oilsands producers to expand capital investments. And perhaps royalties will rebound from their lowest level in five decades.

Federal cash – The province continues to lobby for greater assistance from the federal government.  For the most part, these requests or demands fell on deaf ears.  The province hopes for changes to the federal fiscal stabilization program.  The program provides only minimal assistance when provinces face revenue shocks.  The Premier suggests that $6.5 billion (not $270 million) should be forthcoming.

There are, of course, other options:

Raise taxes – The Alberta budget framework isn’t sustainable.  A rational solution is a sales tax.  Each per cent of a sales tax will raise about $1 billion.  Thus a 4% – 5% increase harmonized with the GST could raise a chuck of cash that would partially fill the revenue hole.  There is also an opportunity for Alberta to resume collecting the carbon tax.  

Embrace deficit financing – Premier Klein erased the net debt using royalty bonanzas with huge disregard for needed infrastructure and social programs.  While it was a signal accomplishment, it didn’t put Alberta’s fiscal situation on a sustainable path. So, today alternatives are few; thus, borrowing money for operations will be part of the mix for the next 3- 5 years.

Here are suggestions of ‘What to do more of – less of – and not at all

More of

  • Rethink the health care reduction strategy.  Government should reach an agreement with the doctors soon.  An Auditor General’s report of a couple of years ago offers strategic advice that should be re-considered.
  • Use velvet glove negotiations with the public sector.  The Klein-era cuts were based on everyone taking a share of the misery.  Government needs to make reductions; but its caustic relationship with the public sector isn’t setting it up for success.
  • And with some political ju-jitsu, the province could even decide to take over the carbon tax from the feds.  

Less of

  • Recognise that the energy industry won’t be a cash cow anytime soon. The Alberta Prayer for ‘one more boom’ cannot be relied on. Oilsands are entering a mature, incremental expansion phase. Global demand and investor sentiment are challenges. 

Not at all

  • Stop alienating Central Canada.  There is little to be gained from continuing a ‘culture’ war with central Canada.  Railing against the carbon tax and reducing environmental regulations gives new talking points about ‘irresponsible Alberta’. And an excuse to punish resource industries!