Saturday, February 21, 2009

Rethinking Alberta

The Government of Alberta is again living beyond its means. This is clear, not just because of the $1 billion deficit in the current fiscal year and the likely deficits for the next two years to be announced in the coming Provincial budget, but from two other factors. The first is that the government relies heavily for its funds on oil and gas royalty revenues, which are vulnerable to fluctuations in the price of commodities, especially oil. The second is that the Government also depends on lottery funds and interest revenues on endowments to fund base operations. These devices enable the government to spend far more per capita than any other Provincial government in Canada and to tax people far less. It simply can’t go on.

It can’t go on for four reasons. The first is, as we see, the current financial planning model is flawed, since so much of the Provincial budget is subject to risk resulting from market factors. If oil remains at around $40 a barrel for the balance of 2009 and rises to no more than $50 a barrel in 2010, significant cuts in public spending or rises in taxes will result. If oil gets back to around $65 adjustments to spending would still be needed, but would be less severe.

The second problem is that health care – the most significant factor in the current deficit – is on track to eat up fifty per cent of government spending by around 2017. This is unacceptable – it would lead to very significant cuts in other areas of government activity and an increases in taxation. Tackling health care remains the most significant challenge we face in Alberta. The current moving of the deck chairs at the board level does not begin to tackle the real challenge of reducing health care spending and its rate of growth. We need to rethink what services we offer, who they are offered to and how they are provided and to refocus our investments on prevention. This now is becoming more urgent, since this area of provincial expenditure is clearly out of control with a projected over spend of $1.5 billion.

The third problem is that the level of per capita spending is too high for the quality and value of services the public receives. Alberta spends $10,771 per person each year. That’s about one-third more than B.C.’s $8,001, Saskatchewan’s $8,090, and Manitoba’s $8,026. Why? Just because Alberta has access to revenues is not an argument for spending. If public services in Alberta were stunningly more effective and radically different, then we could have an argument that such spending was worth it. However, the most likely explanation is that we don’t want to deal with long term investment and diversification issues or to tackle politically tough issues like health care, so we throw cash at the problem. We need to cut public spending and seed more money into future funds, such as the Heritage fund – now at $17 billion in comparison to Norway’s $400 billion.

The final reason we have a challenged economic circumstance is that we under tax people. The often heralded Alberta Advantage focused on being a low tax location for business and people. This is not smart. What is smart is being a great place to live and being an economy that is growing with a government that is focused, highly efficient, procutive and lean. In 2007, income tax for a family of four with two wage earners in Alberta was app. $8,725 with the average for Canada at $11980 – a difference of over $3,000. We replaced direct taxation with royalty, lotto and interest revenues and disconnect people from the cost of their government. In 2009 we went further and abolished health care premiums.

So what do we need to do ? We need to: (a) cut public expenditure in a significant way – 12-15% over the next two fiscal years; (b) increase taxation by introducing a sales tax in Alberta that matches GST – a 5% Provincial sales tax; (c) start rethinking health care and do so in a significant way; (d) stop relying on both interest revenue from the Heritage Fund and lottery money to fund activity and have a plan to build the Heritage fund to $50 billion, with interest revenues being directed to research and innovation aimed at diversifying the economy; (e) reduce the number of public servants by focusing on e-government developments and substantial increases in productivity; (f) develop a meaningful strategic plan for Alberta.

We can test the Provincial budget statements against these core requirements. Don’t hold your breath.

1 comment:

Ken Chapman said...

Great post Stephen - I will add you to my blog roll and send some traffic too.