Wednesday, December 29, 2010

Watch Out - The Premier is About..

As we approach the new year, be prepared for real challenges to our public sector and financial double-think from the Government of Alberta.

Some time ago the Premier of Alberta made two bad decisions. The first was to declare that. “while I am Premier”, there would be no new taxes and no increases in taxes. It was one of those declarations that sounds good at the time but, on reflection. is a terrible mistake. It limits and sets up a requirement for him to resign when taxes inevitably do rise.

His second mistake was to cave into the pressure from the oil and gas sector over royalties – ensuring that Alberta has amongst the lowest regulated royalty rates in the world (in the same league as Yemen).

These too major errors of judgement feed into a philosophic position held by the Premier and the majority of caucus: the principle that government should live within its means and not have deficits or debt. A principle few sensible governments adopt, but always admire in others.

What we are about to see are significant and brutal cuts in Alberta public expenditure of so as to continue to “cover up” the two errors of judgement and sustain a philosophic position, now clearly out dated and inappropriate. Its time for a sea change in thinking – even if the Premier may have to go to make it possible.

The Provincial deficit is growing, due to: (a) a structural change in the economy as it relates to royalty revenues from natural gas – the Province needs to get used to a much lower price for gas (around $4.50 - $5.50 as opposed to $7); (b) the growing strength of the Canadian dollar – oil is priced in US dollars, so the achievement of parity costs the government money; (c) continued relatively high rates of unemployment in some sectors; (d) but a return to inflation for some goods and services.

Estimates of the deficit vary, but let us just assume that its between $5 billion and $6 billion. While this could be covered by a combination of cuts to services and a transfer from the stabilisation fund established by the Government to deal with these situations, we cannot go on doing this. Our key source of revenue in the past – natural gas – is not going to return to “normal” for some considerable time – the new technologies enabling the extraction of shale gas has changed the industry for some time to come. We now rely on modest oil revenues and revenues from casino’s, drink and cigarettes.

Trimming spending is the natural instinct of conservatives – just look at the Wild Rose`s position to see how stark this can be. But they are coy about what this really means. Typically, they protect health care spending, which accounts for the largest single chunk of public expenditure and is a system in need of major reform – but they have already committed to a five year funding formulae and we`re just ending year one.

Education also gets a modicum of protection, especially given that the Minister is seeking a second five year settlement with the teachers union.

So what`s left to cut and how deep? 20-30% would be needed to cover the whole deficit for the remaining departments to balance the budget by March 2012 – another strange commitment made by the Premier.

It i time for Alberta to recogonize that Alberta has a revenue problem. It is time to rethink its tax regime – its time for a 3-5% sales tax. Ted Morton signalled this as an option form review on 25th August, but was quickly told to withdraw this thinking (remember the Premier’s commitment). A sales tax would buy time to rethink our public services – especially health care – and to reposition the Province. The Alberta Advantage of low taxes is no longer a true advantage, and will disappear if, as a result, we have low quality public services.

Its also time to implement in full the recommendations of the royalty review panel which the Premier struck at the time of his appointment. While the industry may sream – they always do – they will also stay and pay. Ask Alaska how it managed to significantly increase royalties (before Palin) and they will tell you that the companies screamed, threatened, offered all sorts of sweeteners, but in the end stayed and paid.

It is also time to commit to modest level of borrowing and debt – something most of us understand, since most people own debt. The idea that governments should be debt free is, frankly, bizarre. The issue isn’t debt or no debt, it is how much debt is reasonable given our understanding of the future patterns of revenue and expenditure. If debt to GDP was at around 4-5% no one would especially be concerned.

Finally, its time for a serious look at the future. The Premiers Economic Council will report in June 2011 and outline a strategy and investments needed for the “next” Alberta. Shifting from a reliance on natural resources, from being debt free and from having a revenue problem to investing wisely in the future is an essential task for the Government. Lets hope they have courage. It doesn’t look promising.


Ken Chapman said...

Good post Stephen. Given the Heritage Fund and the size of other liquid capital - even with give away industry subsidies and irresponsible royalty rates Alberta does not have a debt to GDP ratio - we have and Asset to GDP ratio...only place in North America for sure.

David Harrigan said...

Very good. So nice to hear someone point out that we have a revenue problem! (Well, maybe I should say someone else - the Alberta federation of Labour published an excellent paper on this topic in June.)

But why do you jump to the sales tax?

Should we not deal with the royalty rates, the corporate income tax and the insane flat tax?

Ken Chapman said...

Thx for contributing to the revenue problem conversation David.