Tuesday, February 04, 2020

Kenney's Economic Non Sense

Jason Kenney has made an arbitrary decision that will impact the lives of every Albertan. He wants a balanced budget by 2022. It will not happen and he knows it.
But make no mistake: it is arbitrary.

As I mentioned in an earlier post, Alberta’s net debt is one of the lowest is the developed world at just 11.8%.  ($43.7 billion). It is rising – it rose by over $7 billion since Kenney took over, but it is still modest by any standard – Ontario is over 40% and Canada is 30.5%. Given that Alberta, as measured by GDP per capita, is one the wealthiest places on the planet, context matters. Net debt as a % of GDP is higher for every G7 than it is for Alberta (Japan, for example, is 153% and the UK is 80.8%).

There are two primary reasons for the level of debt: we spend more than we take in revenues; and (b) we do not seek the kind of revenue we could, given the state of corporate and individual finances. We have both a spending challenge – efficiency, effectiveness and spending growth – and a revenue challenge.

Kenney’s basic economic strategy is to stimulate the economy to create economic growth and job growth. He is doing this by focusing significant corporate tax give-aways ($4.7 billion) to already profitable firms and by lowering both corporate taxes and eliminating the carbon tax (except for large emitters). This is unlikely to work for a number of reasons: (a) a variety of studies show that investment and hiring decisions are based on a larger range of factors than the tax regime – education, health, infrastructure, innovation eco-system and competitive environment are bigger factors; (b) recent evaluations of trickle-down economics by both the IMF and a range of researchers who have looked at the US Trump tax give away have concluded that they had no impact on employment or investment.  While it is early in the Kenney autocracy, job losses are growing in Alberta and have been since Kenney became Premier. Alberta has higher levels of unemployment than other higher taxed jurisdictions in Canada.

Having given away significant revenue opportunities and increased the debt by $7 billion, Kenney has also foregone other options: (a) a sales tax where each 1% of such a tax would yield $1.6 billion and 8% would produce $12.8 billion in annual revenues – enough for Alberta’s needs when added to existing revenues; and (b) raising oil and gas royalties – currently industry keeps 96c of every $1 in revenue which is close to being the lowest rate of oil and gas royalty rates anywhere in the world, we could increase this significantly and still enable significant levels of profitability for most projects (some projects would close, but they exist only because they are in effect subsidized). Indeed, if we were to do both of these things which are in the public interest then we would have a balanced budget by 2022.

But we need to look at another feature: unfunded liabilities. One in particular is glaring – the costs of cleaning up the 3,406 orphaned wells is currently estimated at over $30 billion while assets available for this work are just $227 million. This, according to the Auditor General, is an unfunded liability. It could in fact be much higher, especially when other oil and gas clean-up problems are added into the pile – as much as $260 billion. Whether we look at this optimistically or pessimistically, it cannot be pushed under the carpet and action is needed.

So, what to do. Three suggestions: (a) stop the nonsense of trying to balance the budget by 2022 and develop a responsible fiscal plan; (b) manage expenditures while still meeting the needs of Albertan’s – debt is not a bad thing; and (c) increase revenues through taxation and royalty changes.

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