Budget 2016

Prelude to First Quarter Fiscal Update

More dreary news surfaced on 11 August when July’s drilling rights sales were announced by the province’s energy department. The CBC post based on Dan Healing’s article (link below) showed how volatile this source of revenue has been for the Alberta government. In 2011 when oil and gas prices were high and the Montney and Duvernay formations were “discovered”, $3.5 billion poured into the province’s coffers versus perhaps $125 million this fiscal year.

an-equitable-tax-regime-would-help-the-energy-sector-help-all-albertans30-9-16-ej

Sales of drilling rights go from boom to bust in western Canada12-8-16 EJ

worst-possible-time-to-be-going-on-pub-crawl6-9-16-ej

Data on the number of land sales per year. the number of parcels sold, the value of the sales and the average price per hectare is available at Alberta energy land sales history.

Institute for Public Economics’ Post Mortem on Provincial Budget April 2016

As reported in the Edmonton Journal on Friday, 28 April, the Department of Economics brought together seven expert budget analysts to discuss the recent provincial budget. These speakers came from business, media, advocacy groups, academe and public service. All were passionate about the need for a long-term strategy to stabilize the province’s finances.   But how to get there? Each presenter had their own views of the mix of tax and spending policies to achieve first a balanced budget and then a way to pay down the mounting debt.

One of the areas where discussion became heated was on the compensation of public sector workers. One view expressed was that the high private sector wages in Alberta are a reason for high public sector wages. In order to attract or retain employees, public sector wages must be comparable to private sector wages (which are or are among the highest in the country). If we do not pay our best public servants, teachers, nurses, doctors etc., they will go somewhere else for better pay. While this argument may have merit in certain areas where skill sets of public sector workers easily translate into private sector employment (e.g. petroleum engineers, financial analysts, lawyers, communications specialists, administrative assistants) for the most part private sector opportunities for teachers, doctors, nurses and university professors are limited, unless they leave the province. A second factor though which gets missed in comparing most public sector workers (not doctors) with their high paid private sector workers, is the risk the latter group faces such as involuntary lay-offs or loss of bonuses.

It was therefore disappointing that in the budget, very little was said about public sector compensation, other than it represented about one-half of operating expenses. However, if one excludes capital grants and amortization, at an estimated $25.2 billion, the compensation bill accounts for 57 per cent of operating expense. What the Budget did say is that the numbers includes the salary freeze for management salaries and the costs of existing collective agreements. A great deal was stated about “bending the cost curve” in the budget, but nothing new on how one of the largest items is to be ”bent.”

Which brings me back to our discussion at last Thursday’s budget post-mortem. While there was not a consensus among speakers about how to get to balanced budgets and who should pay higher taxes, there was certainly unease among panelist about the debt build-up. Noted was how quickly the DBRS rating agency downgraded the province’s credit rating to AA (High). Some panelists were dismayed that the government had no clear plan or time frame to achieve balance on an operating side, let alone eliminating borrowing for capital. One panelist expressed worry about a flight of capital from the province as a result of tax changes at the highest marginal rate and corporate tax rates.

As the panel turned to solutions, the balance of opinion seemed to favour a consumption tax (HST) along with a concerted effort to lower the cost of government to per capita spending levels in British Columbia. This would be challenging given constant demands for more, not less, government services.

In a pre- budget session at the University of Alberta’s Business School, Premier Notley and Finance Minister Joe Ceci fielded questions from students and business leaders who were urging higher spending to benefit their sectors. The final questioner, an Accounting Professor, gamely asked “how are we going to pay for all this?” The Premier made it very clear that her party pledged during the election not to bring in a sales tax and she would not do so. Significantly she noted, and I’m paraphrasing here, that a discussion on this issue could take place in civil society. Earlier she observed that the economic and fiscal challenges facing the government were generational in nature and she felt an obligation to keep the fiscal situation redeemable. At the same time, she was clearly frustrated that the financial situation her government inherited precluded socially progressive spending programs, such as day care.

The burning issue then is how soon should this discussion take place? David Dodge in his report last October recommended an ambitious capital program (premised on some faulty data) but warned that under low oil price assumptions (U.S. $51 – $58 per barrel by 2019) the capital program should be cut back to avoid a dangerous debt build up.

We have seen the Premier change her view on the Northern Gateway pipeline. After nearly a year in office, she understands the magnitude of the fiscal and economic quagmire the province is in. Unfortunately this budget will seriously limit her government’s and future government’s fiscal options as unproductive interest payments consume a larger portion of spending. The fiscal plan, which contemplates a decline of financial assets of $37 billion over three years, is sadly achievable in that Alberta has the capacity to borrow that money over the next three years. But can we as taxpayers and citizens wait that long? It is understandable that this government does not want to repeat the “mistakes” of the Klein years. Still reaction to past mistakes is not a strategy. Promoting Budget 2016 in the same way the Tories have by re-announcing spending initiatives will not address the fiscal pressures. Band-aid tax incentives will not make a difference as households struggle to make their mortgage payments and restaurants close down for lack of business. Most of the economic problems that beset Alberta have nothing to do with government policy. But sadly, unlike Norway with its trillion dollar fund and high marginal tax rates, the Alberta government has run out of savings to stabilize government programs.

What did that old bumper sticker say “Please Lord give me another oil boom, and I promise not to piss it away!”?

Bob Ascah is a Fellow with the Institute for Public Economics at the University of Alberta and organized last week’s budget post-mortem

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