A Recovery Program for Alberta: A 10-Year Plan to End the Addiction to Resource Revenues
13 Pages Posted: 30 Mar 2013
Date Written: March 3, 2013
Alberta has a substance-abuse problem. The substance is fossil fuels, and the province has become hooked on the revenues from oil and gas sales to fund its spending on health, education and social services. As we are so often told, the first step in beating an addiction is admitting that a compulsion has gotten out of control. Recent announcements suggest that Alberta’s leaders appear to have finally taken that first crucial step. We applaud them for doing so. But if they plan to get this addiction under control and so ward off the sort of financial turmoil that has tormented Alberta in the past, they will have to do more.
In this note we provide a menu of policy choices all of which take the government to a sustainable budget by 2023. They all involve reductions in what we identify as the government’s Budget Gap — that is, the difference between its spending and all its revenue besides the revenue it earns from nonrenewable resources. The size of that gap summarizes just how much provincial government spending on health care, education and social services is at the mercy of commodity-market swings. If current trajectories of government spending continue, then in another 10 years the gap will be nearly 4 times what it was in 1999. Reducing the size of the Budget Gap is necessary to protect Albertans from repeatedly suffering wide swings in levels of public service, shifting tax rates and plunges into deficit and debt.
We identify a variety of ways to achieve fiscal sustainability over 10 years. Our investigation highlights two key results. First, provincial spending on health care currently comprises 40 per cent of provincial expenditures and is growing at a rate that causes it to double every 20 years. Exempting health care spending from cuts comes at the price of draconian cuts to education and social services of over 30% even after adjusting for inflation and population growth. It is therefore hard to fathom that constraints on health spending can be avoided altogether. Second, to reduce the size of the cuts to spending required to achieve fiscal sustainability, the government can raise rates on existing taxes or introduce a new source of revenue like a sales tax. It is important to note, however, that new revenue without spending restraint cannot solve the problem. Additional revenue can only help achieve fiscal sustainability if it is accompanied by a program of spending restraint along with a sales tax of 3, 6 and 9 per cent and an increase in the personal tax rate to between 12 and 17 per cent from its current 10 per cent.
None of these are easy options. But weaning itself off of its addiction to resource revenue means Alberta’s days of taking the easy way are over. Spending cuts alone or spending cuts in conjunction with increases in taxes are necessary steps to recovery. The government of Alberta has finally admitted it has a problem. In this note we identify the ways it can fix it.
Keywords: spending, debt, deficit, revenue, health, social, fiscal, resource, royalty, tax, government, Alberta, education, budget
JEL Classification: Q43, H24, H25, H71, H72, E61, E62
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