Category Archives: Budget

Post-mortem on provincial budget

Originally posted 20 March 2017

On Thursday 23 March, the Institute for Public Economics will again host a public forum on the provincial budget. This is the eight year that the Institute has invited guest panelists from business, labour, media, academe, and other groups to debate the fiscal policies of the provincial government.  The event will take place at the University of Alberta, H.M. Tory Building, Room B-87 this Thursday at 4:30 p.m. – 6 p.m.  After the panelists speak, there will be a question and answer period. Continue reading

Budget 2017- Opinion

Overview

Joe Ceci’s 2017 budget could be characterized as a “steady as she goes” budget. The citizens of Alberta will be paying for this budget, and many previous budgets, with higher taxes and higher debt service costs for years, if not decades, to come. There are many observers who feel the budget was “ok” since programs and capital spending are not disturbed. There are also many Albertans who do not believe using the credit card to support spending is the right way forward.

One half of Mr. Ceci’s address spoke of the capital spending and repair and maintenance undertaken by the Government. Virtually no corner of the province escaped mention:

  • a courthouse for Red Deer
  • a new hospital for South Edmonton
  • Highway construction for Fort Saskatchewan
  • Deerfoot Trail in Calgary and the new Cancer Centre
  • Safe drinking in First Nations’ communities
  • A new bridge for Peace River
  • Affordable seniors homes and lodging in Leduc and Barrhead, Calgary and Londonderry, “from Clairmont to Fort Macleod, from Cold Lake to Canmore.”

Much of the blame for this capital spending on critical infrastructure is due to the previous government, according to the speech. For example.+

“Right now, we are dealing with issues of overcrowding and buildings that have been allowed to fall into disrepair. In some schools, there’s water damage and obsolete heating systems. In others, roofs sag and the cold winter’s wind seeps through aging window frames. When we took office, glaring infrastructure issues in health care needed fixing. …Here’s an example. There’s a bus in Lac La Biche where people have been forced for years to get their dialysis treatment. The bus doesn’t move, which is odd for a bus.The reason this dialysis bus doesn’t move – the wheels have literally come off.”

From an economic point of view, this will provide continuing comfort to the construction sector. But , the Budget speech did not address concerns found in the Economic Outlook portion of the Budget predicting construction to slow over the next couple of years reflecting the completion of major private sector projects (Ice District). To be sure, petrochemical investments subsidized by royalty holidays will support private investment but the halcyon days of oilsands’ megaprojects are gone- and possibly forever.

Reaction to Klein Cuts 

“Some said – and still say – that government should make deep cuts to public services, such as health care and education.Some wanted to implement a health-care tax that would have hurt families who could least afford it. Families would have been forced to pay more and get less, with longer health-care wait lists, overcrowded emergency rooms, much bigger class sizes, and lost jobs.That’s why our government made a different choice.”

As I have written previously, much of the core base of the NDP endured several years of expenditure cuts, including reductions in wages. This experience is deep-seated and informs fiscal policy-making in many ways. The language above is deeply emotive and conjures up a Dickensian decade of  great human tragedy. First, Klein cut salaries by five per cent. Today while management salaries, and political staff salaries are frozen, open collective bargaining continues. Normally when governments are running deficits of the current magnitude, wages are frozen or, in exceptional cases, cut. The budget highlights salary reductions for executives at provincial agencies saving $16 million and a deal with physicians saving $400 million in 2017. That is a good start and may leaven the demands of teachers and nurses.

Secondly, another legacy of the Klein cuts was a reduction in capital spending leading to an “infrastructure deficit.” In spite of the huge ramp up in capital spending during the Stelmach-Redford-Prentice years, there appears to be no shortage of needs in the infrastructure arena. The government was helped in making the case by David Dodge in his September 2015 report. Third, as the Klein government’s fiscal position rapidly changed through improved budgeting, a lower cost base, and rising non-renewable resource revenue, social democrats concluded that the cuts were unnecessary or revenue could have been raised to fill the budget gap. Across the border in Saskatchewan, the NDP government of Roy Romanow had inherited an even worse budgetary position than Klein was bequeathed. The Saskatchewan NDP approach was more balanced however with increased taxes but also tough choices on expenditures,  including the closing of 52 rural hospitals.

Revenue

In a throwback to PC times, the tax section trumpets the glorious refrain from the Klein as  Alberta’s Tax Advantage.  The famous chart, circa 2017,  is reproduced below.

IMG_20170316_0008

Most of the difference is the absence of a sales tax in Alberta. Much was made of the fact that low-income Albertans and families pay virtually no tax.  This is justifiably so as social cohesion is strengthened when those who can best afford do pay more in taxes. On the other hand, investor and investment tax credits are being provided to individuals who likely do not need government support to invest or likely would be making these investments anyway.

Happily for smokers and drinkers no increase to sin taxes was added. Nor was the government willing to examine increases in wealth taxes such as probate fees, which are amongst the lowest in the country. As far as the much hated carbon tax is concerned, except for Saskatchewan and Manitoba, gasoline and diesel fuel remain near the bottom of the taxation pole.

IMG_20170316_0010

Of course underlying apparent desirability of  being the lowest taxed jurisdiction is the fear of touching the Voldemort of Alberta politics- a consumption tax.  If this budget confirms anything, it’s that the three main political parties (NDP, Wildrose, and the PC’s) are not willing to talk about how to replace the oil gusher.

Mayes carton17-3-17 EJ

Expenditures

On the expenditure front, spending continues to creep upwards. Since the debt is growing  faster than other spending ($15.2 billion is to be borrowed this year or 46.5 per cent of the total quantum of debt at the end of March 2017!). Over time debt service costs which  consume more and more of revenue collected. Debt servicing will total $1.4 billion in fiscal 2017-18, rising to about $2.3 billion in 2019-20. By then, this line item will be the fifth largest expense after Health, Education, Advanced Education, and Community and Social Services.

On total public sector compensation, the budget shows an increase of $456 million from current levels or a 1.8 per cent rise. This figure includes compensation for physicians. The salary creep will undoubtedly draw protests from the Opposition who will argue that the Alberta public sector workforce is one of the highest paid in the country and therefore should not be sheltered from the general economic downturn.

Capital spending, on a consolidated basis, will be $9.2 billion including $8.2 billion in core government spending and $1 billion for schools, universities, colleges. and hospitals.Capital spending will remain high at between $7.5 billion to $8 billion in 2018-20.  Included in the Budget for the first time is a long list of unfunded projects.

It’s the Debt, Stupid

By 31 March 2020, the provincial government is estimated to have $42 billion in “liabilities for capital projects.”  As well, another $29 billion in liabilities relating to the Teachers’ Pension Plan funding and “direct borrowing for the fiscal plan” will be added for a total of $71 billion. From an estimated  financial asset position of $3.9 billion at 31 March 2017, the province is expected to have net financial liabilities of nearly -$45 billion by 31 March 2020.  This astounding reversal is similar to the 1985- 1993 period when a $1.2 billion surplus turned into a series of eight straight deficits ranging from a low of $761 million  to a high of $4 billion in 1986-87. Net assets fell from $7.2 billion to a negative $13.4 billion by 1994. The continued over-reliance on non-renewable resource revenue, the inability of past governments to save oil and gas revenue, to restrain spending, combined with an unwillingness to find alternative revenue sources, is reminiscent of this province’s fiscal history in the 1920s and 1930s.

Mayes cartoon24-3-17 EJ

Conclusion

As more citizens become aware of the string of deficits, we might expect them to ask questions about the provincial government’s finances. This is ultimately a good  thing.  The current government is convinced no cutting and no tax increases are the right way to run or stabilize an economy.  In Alberta there seems to be a fiscal pendulum that occurs every generatio or so. The Klein revolution was a reaction to the Lougheed-Getty legacy of province-building and the Notley “revolution” is a reaction to Klein’s decision to attack spending rather than take a more nuanced approach on both revenue and expenditure. Now we have arguably the worse of all possible worlds- no tax increases, no expenditure restraint, and inexorably high deficits. Expect credit downgrades in the next few months.

Below are some of the newspapers’ coverage from the Edmonton Journal and The Globe and Mail on 17 March 2017 and subsequent articles on the Alberta budget..

Teachers vote 78% in favour of deal16-5-17 EJ

Show us the plan to balance the budget13-5-17 EJ

‘Me too’ clause in teachers’ deal28-4-17 EJ

Tax credits would boost digital media sector27-4-17 EJ

Study gives Albert A+ for fiscal reporting27-3-17 EJ

Carbon tax requires trust in government11-4-17 EJ

NDP faces crush of contract talks6-4-17 EJ

Alberta to borrow $2B to cover electricity losses1-4-17 EJ

Notley defends budget as Wall snipes on Twitter28-3-17 EJ

The real price of oil25-3-17 GM

Pick your Poison24-3-17 EJ

Notley blasts Wall- and Wildrose23-3-17 EJ

Can Alberta handle the truth22-3-17 GM

Alberta NDP’s budget has business crowd seeing red21-3-17 GM

Chamber president criticizes budget21-3-17 EJ

Kenney owes a debt of gratitude to Notley18-3-17 GM

Alberta’s growing debt ‘absolutely manageable,’ according to the premier18-3-17 EJ

Union boss calls on Alberta to boost funding for ambulance services18-3-17 EJ

Alberta budget projects six years of deficit17-3-17 GM

Budget pushes Alberta’s debt to $45B17-3-17 EJ

Calgary gets 200-bed long-term care facility, rehab support housing17-3-17 EJ

city’s hospitals get $1B boost17-3-17 EJ

How do we get back to balance17-3-17 EJ

NDP injects $14.5 M into court system to break logjam17-3-17 EJ

NDP leaning heavily on oil and gas recovery17-3-17 EJ

NDP struggles to make ends meet17-3-17 GM

NDP waters down its promises as economy fizzles17-3-17 EJ

Notley’s grand budget gambles17-3-17 GM

Opposition fears rating downgrade as province’s finances deteriorate17-3-17 EJ

Province to roll out grant program for craft distillers17-3-17 EJ

Universities win funding for construction projects17-3-17 EJ

Third Quarter Fiscal Update

Green shoots- still clouds on horizon

Treasury Board President and Finance Minister, Joe Ceci released the Government of Alberta’s Third Quarter Fiscal Update and Economic Statement on Thursday 23 February 2017. Overall the fiscal picture has not changed very much over the past three months. The 2017-18 budget is expected to be in March and will likely reflect some tweaks to the fiscal 2017 numbers published today.

There is definitely some more optimism in Alberta today as oil prices have stabilized, pipeline approvals announced, and Fort McMurray rebuilds. Possibly the worst is behind the economy but there is little reason to be complacent. Today Mr. Ceci announced the passage of an Order in Council authorizing the borrowing of up to $14 billion. He immediately cautioned that this approval is consistent with the budget plan. His departmental officials have been rather busy borrowing this year. Compared to an estimate of $5.2 billion in borrowing to this point, his department has brought in nearly $12 billion. This strategy appears to be both strategic and opportunistic given that long-term rates in the U.S. are rising which is a vast pool of capital the province has tapped and aims to tap in the future.  While the Bank of Canada has paused on bumping short-term rates, long-term rates are rising in this country along with the rest of the world.

Financing requirements for Alberta Treasury Branches are $750 million below those anticipated last April suggesting that ATB’s deposit-taking capacity has improved over the past nine months.

The expected deficit for the fiscal year ending 31 March 2017 is now estimated at $10.8 billion, up $444 million from the April 2016 budget.  On the revenue side, the notable changes include a $981 million drop in expected corporate income tax. This drop presumably reflects the combination of losses in the oilpatch and some movement of corporate income out from the province as rates rose to 12 per cent from 10 per cent. Personal income tax is flat suggesting the economy is stabilizing. Non-renewable resource revenue increased by $1.1 billion due to higher bitumen and crude oil royalties.  The total take of $2.4 billion is still expected to be around $$00 million less than last fiscal year and well below historical levels. On the positive side contributions from the federal government were $664 million higher than estimated mainly due to the Fort McMurray fire and offset extraordinary expenditures this year. Another pleasant surprise is higher expected investment income from the Heritage Fund ($691 million) and Endowment funds ($94 million) as a result of rising stock markets.

Operating spending is forecast to be $1.8 billion higher than budgeted.  These deviations are in the health care area ($284 million) and $1.1 billion from an accounting adjustment recognizing the agreements to pay electricity generators $97 million per annum for 14 years to transition away from coal. The provision takes the net present value of the payments and books them in 2016-17. Other expenditure increases were for income support, child intervention and people with disabilities programs and school enrollment growth.

Capital spending which was budgeted at $8.5 billion is forecast to come in at $7.3 billion. The principal causes are due to “project re-profiling due mainly to
project progress, the Wood Buffalo wildfire, adverse weather and other factors.”

The economic outlook is cautiously optimistic suggesting real GDP will grow by 2.4 per  cent in 2017 due to higher oil and bitumen production, improved drilling activity, and the Fort McMurray re-build. Nevertheless, construction is forecast to be muted as major private sector projects wrap up and residential housing starts remain weak except in Wood Buffalo area. Another continuing drag are lower corporate profits and slower population growth.

The Update does not alter the fact that the provincial government’s finances have deteriorated seriously over the past five years. The Minister was pressed this afternoon on the issue of how the government would respond to public sector unions in upcoming negotiations. The Minister naturally demurred as this remit is a sensitive one given the base of the governing party. He again stressed the goal of the government in protecting Albertans from the ill effects of the economic downturn. Announcements about provincial agency restructuring are expected in a few days. Executive pay at provincial agencies should also be examined as growing income inequality is, or should be, an important issue for the young social democratic government.

The main clouds that overhang the economy is the weak employment picture with a recent survey on oilpatch employment suggesting companies will not be hiring back large numbers of workers {oil-industry-likely-faces-jobless-recovery-study23}-2-17-ej}. The rise in resource revenue, while positive, illustrates how deep in the fiscal hole the province is in. With a deficit of $10 billion, even gains of $3-$4 billion in resource revenue will not bring a balanced budget nearer without either a harmonized sales tax or public sector restructuring and continuing salary restraint. Another structural weakness in the budget is the volatility of investment income reflecting the structure of the Heritage and endowment funds and accounting policies requiring the value of securities’ holdings be “marked to market.”  Increased volatility in not something the provincial government needs at this time.

Much uncertainty still surrounds the Alberta economy and provincial budget.

Alberta fiscal plan unlikely to cut deficit16-3-17 GM

NDP budget has cash for 10 new schools16-3-17 EJ

New hospital to be built in Edmonton16-3-17 EJ

Wildrose urges ‘fiscal Dragon’s Den’ to find savings16-3-17 EJ

Ceci does little to quell D-word15-3-17 EJ

NDP budget offers hope- and ammunition for opposition11-3-17 GM

Red Deer Hospital pain felt all across Alberta11-3-17 EJ

Ceci hoping for big savings9-3-17 EJ

Notley resolute on carbon tax depsite ‘uncertainty’ down south9-3-17 EJ

Union members ratify deal with AHS8-3-17 EJ

alberta-book-publsihers-seeking-15m-in-funding25-2-17-ej

sluggish-capital-spending-dampens-ndp-momentum24-2-17-ej

were-not-out-of-the-woods-yet-far-from-it-ceci-says24-2-17-ej

climate-change-policies-add-1-billion-to-alberta-expenses24-2-17-gm

Not a great start to Budget 2017

Opinion

On 9 January 2017 at 11:23 a.m. I received an email from the Government of Alberta with a press release entitled “Albertans asked for input into Budget 2017”  [News Release].  Puzzled by the contradiction between the desirability of open public consultation on matters of great public interest and these closed door meetings, I hopefully contacted Mike Brown, the Press Secretary for Treasury Board President Joe Ceci, at 12:12 p.m.to learn where the Edmonton event was to be held.  As veteran political columnist, Graham Thomson, reported in today’s Edmonton Journal [ndps-public-consultations-look-more-like-public-relations10-1-17-ej] he was able to get a response from Brown, albeit unsatisfactorily, on the secret location of the meeting. At the time of writing (6:30 p.m. 11 January 2017), I am still waiting for an acknowledgement.

As a follower of provincial politics and budget preparations over the past three decades, it baffles me why any government would wish to insulate itself from open public debate on fiscal matters.  At a time when it should occur to a new government that past budgetary inaction was restricting future fiscal flexibility (daycare funding?) and undermining the long-term sustainability of government finances, a public relations approach is adopted. No wonder voters distrust governments today. Just as Justin Trudeau and Kathleen Wynne are attempting damage control regarding the “cash for access” scandals and the Prime Minister doing a “meet Canadians” tour, public cynicism reaches new heights.

While it is normal for governments to wish to hear from its key supporters and constituencies on their budget wants, surely it is incumbent for governments to hear advice from those who may have different views? Unfortunately, this in camera advice will not be known and, hence, not publicly debated. Claims made behind closed doors and incorporated into public policy are not always evidence-based or willingly challenged by politicians or senior officials. Further damaging the government’s credibility, as it “encourages” views from the public, is the reluctance to release the names of persons whom it has invited to these fora.

province-open-to-public-input-on-priorities-for-budget-201710-1-17-ej

According to the News Release, Mr. Ceci “will host meetings with community leaders and the public while visiting towns and cities around the province.” The release further states: :

“We saw some promising signs of economic stability leading into the new year, but there is still a lot of work to do as we prepare for the next budget. These are still challenging economic times and I would like to hear from Albertans about their priorities and ideas on how to best meet their needs without increasing costs or affecting front-line services.”

Also accompanying the release were links to online submissions (up to 1500 words) on the budget and instructions for an telephone townhall with the Premier and Minister at the end of this month.

poll-finds-support-for-cigarette-tax-hike9-2-17-ej

ndp-offers-false-choice-between-big-spending-and-severe-cuts8-2-17-ej

public-sector-set-to-bargain-in-20174-2-17-ej

wildrose-calls-pay-hikes-for-public-sector-slap-in-the-face3-2-17-ej

So what are the policy questions that these invited guests should be asking the Minister and his designated officials?

  1. How (and when) is the deficit to be eliminated? A more basic question is should the deficit be eliminated?
  2. What percentage of the proposed deficit elimination measures will come from new revenue (higher taxes, royalties, user fees, new taxes) versus program expenditure reductions?
  3. What is the government’s strategy on salary and benefit negotiations with its unions and how will executive compensation be addressed in provincial agencies?
  4. How will the government’s capital program make the Alberta economy more productive in the long run?alberta-revenue-and-expenditure-1981-2013e_4325_image001