Wednesday, November 14, 2012

Alberta's Fiscal Bump - Moving Forward

There are three ways in which a government can balance expenditure against revenue and ensure a balanced budget. The first is to ensure that the revenues (taxes, royalties, returns from investments, fees for service) match or exceed expenditure. The second is for expenditure to be managed in such a way as to ensure that it matches the available revenue. Finally, the government can use a variety of instruments or techniques to take expenditures hitherto "on the books" off the books for the future, making it look like the expenditure is less.

There is a conservative philosophic position that "debt is bad" and "deficits, because they create debt, are bad". This is nonsense. Some debt - like debts incurred because investments have been made in the future - are smart debts. Some other debts - incurring debts by killing contracts that should never have been signed in the first place (think Ontario and energy) are inappropriate.

Alberta has debt but there is a second philosophic position taken by our politicians that gets in the way of a solution. That is that the idea of raising taxes is "out of the question". This too is nonsense, though it is the kind of non-sense we hear from both the Wild Rose and the Progressive Conservatives. It is driven by the idea that Alberta needs to be a low tax economy so as to be competitive with other jurisdictions. This would be fine if we managed an operating surplus or managed within our means. We don't and haven't done so for some time.

Also, competitive advantage has a number of components of which taxation levels is just one. Key is the quality of health, education and infrastructure – all of the things we spend taxes on.

So we are left with two options, given our own fiscal bump we have to deal with. The first is to cut services and better manage those we retain so that they consistently deliver needed services within budget. The language of this is "austerity".

Alberta is used to austerity - it was a characteristic of the first period of the Klein administration - and it doesn't like it. On the scale needed to balance the budget and allow for contingencies (fires like Slave Lake or flooding as in Medicine Hat), cuts alone will not meet with general acceptance, especially since they would need to apply to key expenditures - social services, health, education and post-secondary education. Our finance Minister, Doug Horner, has initiated a review of all services and activities based on results. It is a flawed process, but it is a start. What is needed now is some rigour in this process and some real teeth given to the "expert" panels formed to analyze the results.

The second strategy is to remove some capital expenditure normally undertaken by government and to move it into a public finance initiative known as public:private partnerships, or P3's. This is when a private company incurs the capital costs of building a road, a school, a library or a hospital and the Government then leases this. The building is owned by the company not the people and what shows on the books is not a capital asset, but a lease cost.

Such activities are common - P3's have been part of the UK landscape for some time. Here is what we know:

  • ·       P3's cost the taxpayers more than if the government builds the building or the road - the private companies secure premiums. While all governments will tell you that they will "negotiate tough", they don't. It is more expensive.

  • ·       If buildings are no lingers required - demographics shift and the school or hospital we thought we needed is no longer needed, for example - the building still has robe paid for. It's up to the owner to determine use.

  • ·       The ongoing costs of the P3 are rarely fully accounted for in planning. The costs of "changes and modifications" (e.g. when school enrolments is higher than anticipated and adjustments need to be made to the building) are frequently more expensive, take longer and are begrudged by the owner.

  • ·       Staff who work in P3’s are surprised at the extent of "permissions" they need to do routine things - hang a new picture on the wall, for example.

  • ·       Maintenance and cleaning of a P3 facility is usually the responsibility of the owner, who usually contract this work out to non union employees. We would have school and health care systems with different standards of maintenance and cleaning in the same zone or district. 

  • ·       When the community lease ends, the building can be used by the owner for any purpose. It is their building. The government usually owns the land, what normally happens is that the owners bargain tough for higher lease rates.

So this is how Doug Horner is thinking he can make it look like the "books" are getting into balance when in fact we are paying more for less.

The real solution here involves these components:

  • .         Undertake a comprehensive, thorough results based review of the performance of all services and identify which services should be kept and what measures of performance should be used to ensure quality of service for Albertans. Cost these services for scale and growth. Cut services which are no longer "fit for purpose".

  •       Agree that a certain % of debt is acceptable for a growing economy - something like 20% of GDP, but that this should relate to investments in our future - education, infrastructure, innovation and not for maintenance (health, social services etc). 

  •      Tax appropriately even if it means increasing taxes.

  •      Only use P3's when these are demonstrably cost competitive over the life of the contract with the private provider. This should be rare and not the norm. Use independent contract review to determine that this is the case and to recommend completion.

  •     Take the time it takes to sell a different financial philosophy - investing in the future with modest debt is better than balancing the budget and mortgaging the capital infrastructure for future generations. 

It's tough to sell when for twenty five years we have heard that debt is bad and being debt free is good, but few believe this anymore. Most Albertans would pay a little more for quality services for which there is a demonstrable need when it can be shown that the delivery of these services are efficient and effective.

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