The Parkland Institute

Op-eds | February 03, 2010

Revenue the real problem

Now's the time to dip into 'rainy-day' fund, avoid raising taxes

by Greg Flanagan

We are on the eve of more budget destruction in Alberta. The recent appointment of Ted Morton as Minister of Finance signals a further move in the direction of budget cuts as indicated by his statements that the “all-you-can-eat buffet” of public services is about to end.

Taxes, as Premier Stelmach has touted, will not be increased to cover the impending deficit. This is the same ideological response that Albertans were presented with during the Klein regime, where it was repeated often that government was too large, taxes needed to be low and public services were unsustainable.

Cuts have already been unfolding. Minister Mary Anne Jablonski met this week with community groups about voluntary measures to address “necessary cuts” to service for people with disabilities. Are cuts in services to people with disabilities really necessary?

Cutting spending is only the answer to a spending problem. But Alberta does not have a spending problem; we have a revenue problem.

Spending trends mean nothing without a context—population size, size of the economy, inflation and economic growth.

When Alberta’s social spending is compared to other provinces, it ranges from the middle of the pack to the very bottom.

Parkland Institute research shows that despite the province’s huge wealth advantage, Alberta’s health and education spending is the fourth lowest among provinces (six provinces spend more per capita) at $650 per person below average. It would require an additional spending of $2.25 billion to bring Alberta up to just the average.

When Alberta’s relatively high inflation rate is considered, Alberta falls even further below the average as those dollars buy less public services in Alberta than other provinces.

Relative to the province’s income or to gross domestic product (GDP), Alberta has by far the smallest public spending in Canada. Alberta’s spending is less than 12 per cent of gross provincial product (GPP) while the average of the other nine provinces is 22.5 per cent. This has fallen precipitously from 1993 when Alberta spent more than 22 per cent of GPP on public services.

As relative spending has fallen off, so, too, have revenues, causing Alberta’s current deficit.

Alberta collects a mere 4.63 per cent of GPP in taxes compared to the average for all other nine provinces at 10.49 per cent. These taxes include personal and corporate income taxes, sales taxes and excise taxes on tobacco products, gasoline, etc.

The percentages range from a high of 13.46 per cent in Quebec to a low of 8.76 per cent in B.C. If Alberta were to raise taxes by more than $10 billion a year, it would still be the lowest tax jurisdiction in the nation.

Alberta would need to raise taxes by $14 billion a year just to bring it up to the average.

How does Alberta manage to tax so little of its provincial income? The answer is that Alberta has spent its non-renewable resources on current needs.

Such revenue by its nature is volatile. By making public services spending contingent on those funds instead of reliable tax revenues, the government has generated constant instability and disruptions—as well as the current deficit.

The Stelmach government has made it clear that there will be no action taken in 2010 to address the revenue problem.

The government also refuses to use the “rainy-day” Sustainability Fund for next year’s budget, though it was created for just such an occasion. At the same time, the government is determined not to run any more deficits.

Consequently, nebulous spending cuts in the range of $2 billion have been promised with more alluded to.

The cuts expected will once again decimate public services, and cause ripple-effect layoffs in the private sector, not to mention hurting the most underprivileged among us.

What should we be doing?

First, it is exceptionally imprudent to cut spending while the economy has not recovered.

Alberta is still down 78,000 full-time jobs. For this budget, at the very least, we should be increasing spending to keep it in line with population growth and inflation.

If we want to additionally stimulate the economy we need to boost spending on short-term capital and social programs. In the short term we can afford increased spending without raising taxes. Alberta has more than $40 billion in reserves while most other provinces have net public debt.

Even after this year’s deficit (about $4 billion) Alberta will have $13 billion left in the rainy-day fund. This is the rainy day.

In the long run, we need a government with vision and a plan. The Klein years were wasted years. Does Stelmach really want to continue in the same vein?

This plan should include mechanisms to ensure stable and predictable funding of public sector services. The level of these services should be objectively determined through political processes that include all Albertans.

Once service levels are determined, appropriate funding should be established with fair taxation.

Once fair royalty capture is established, these resource revenues should go directly into a savings/investment program. Income from this program could eventually reduce taxes for lower-income individuals and families, and people with disabilities would not need to worry about politically motivated service cuts.

Greg Flanagan is a Calgary economist, recently retired from the University of Lethbridge where he was assistant dean of the faculty of management. He is a research associate with the Parkland Institute.

Links to Media:

• Edmonton Journal, February 03, 2010

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