POLICY 

TOWARDS A FISCALLY SUSTAINABLE ALBERTA

A Review of Alberta Government Finances and a Path Forward

Alberta, we have a problem. For years, our governments have spent too much, and made too little. And the debt is building up.

We need to make some hard decisions about our revenues and expenses to bring Alberta back to a more sustainable position. If we don’t take reasonable action soon, we’ll need to take drastic action later.

The Business Council of Alberta’s preliminary report, Towards a Fiscally Sustainable Alberta: A Review of Provincial Government Finances, looks at Alberta’s historical performance of, and approach to, fiscal management, including an examination of our reliance on volatile resource royalties, and recommends some broad actions to tackle this big challenge—from a discussion of a sales tax to ways to grow our tax base.

Alberta’s fiscal challenge is large and long standing. For years, we have undertaxed and overspent, and this has created a cause for serious concern—growing debt and concern of fiscal sustainability. While COVID has magnified this problem, there are several long-term factors that have underpinned Alberta’s revenue and expenditures, including

 

  • revenues highly dependent upon volatile and declining resource royalties;
  • a relatively low tax burden on Albertans, combined with sluggish economic growth;
  • per capita spending levels that are 11% higher than the average of the other nine provinces; and
  • a political/social climate resistant to fiscal restraint or increased taxation; and
  • an outdated mythology about being home to no provincial consumption tax.


What is fiscal sustainability?

Fiscal sustainability refers to a government’s ability to manage its debt over the long term, while providing high quality goods and services at a given tax rate. It considers expected revenues and expenses, and it does not privilege one size of government over another, nor assume that a government will never a run deficit.

Alberta has a revenue and expense problem

Historically, Alberta’s natural resources have provided significant economic growth, investment, opportunity, and revenue for the province.

When resource revenues were strong, Albertans received more from public spending on goods and services per year than they paid as taxes and user fees into the system. This created a low-tax, high-spend gap, which was financed by resources revenues.

However, resource revenues are historically volatile, as commodity prices fluctuate, which makes it difficult to accurately forecast the revenues earned from these resources.

So, when resource revenues were strong, this created pressure to spend more on goods and services, and when resource revenues dipped, the pressure to spend maintained.

As resource revenues trend downward, spending pressures hold steady and the economy remains sluggish, Alberta now maintains an artificial—and unsustainable—high-spend, low-taxation fiscal model, financed primarily through additional government borrowing.

These divergent trends—declining revenues and rising expenditures—have caused Alberta’s fiscal situation to deteriorate dramatically. And even though overall debt levels remain manageable today, they are increasing rapidly, with no clear path to budget balance or fiscal sustainability.

Towards fiscal sustainability

We must fix our fiscal model now. By doing so, we can avoid the most severe economic and social impacts and help build a prosperous province for our children and grandchildren.

While the COVID outbreak has magnified the existing problem, Alberta’s fiscal challenges were evident before the shutdown began and will continue once the immediate crisis has passed.

We believe that Albertans deserve to get good value for their money, and to achieve fiscal sustainability in Alberta, we will need to take a hard look at both government revenues and expenditures.

The McKinnon report, released in September 2019, provides several recommendations to address the expenditure side of Alberta’s ledger, and we believe that bringing our expenses in line is a critical first step in achieving fiscal sustainability.

Cutting spending alone will not be enough; we must also address our revenues.

Our report outlines two recommendations to improve Alberta’s revenues—including the importance of economic growth in expanding and enriching the provincial tax base.

Our Recommendations

1. Re-imagining our revenue model

Now is the time to explore transforming our revenue model. Tax reform and modernization could help increase and stabilize revenue and stimulate economic growth.

What might such reform look like? We see two key options that are highly debated in Alberta, yet would not only generate new revenues for the province, but would contribute to achieving the principles of fairness, stability, simplicity and competitiveness, enabling the province to broadly re-imagine our revenue model overall.

Harmonized Sales Tax

An HST could bring in about $1 billion for every 1% tax point in stable, predictable revenue, allowing more future resource revenue to be saved. Alberta remains the only province in Canada without a sales tax.

Alberta Consumer Carbon Tax

A consumer carbon tax allows producers to pass the cost down and preserve business competitiveness while also generating government revenue and increasing the incentive to reduce GHG emissions.

2. Growing the tax base

Government revenue growth is closely tied to growth in the provincial economy. Strong economic expansion creates jobs, raises wages, and increases business success.

Our recent report, Relaunch, Recovery, and Beyond: A Prosperity Framework for Alberta, outlines a series of pillars and guiding principles we believe need to be central to creating a competitive, innovative, and inclusive Alberta economy.

Read our recommendations here.

The challenge in front of us is great and urgent. This paper identifies some of the key drivers and core proposals to repair Alberta’s fiscal model and restore fiscal health. We will explore additional options and policies in greater detail and release detailed recommendations later this year.

If you want to among the first to receive the report, sign up for our bi-weekly newsletter here.

For more information, contact:

Mike Holden, Vice President, Policy & Chief Economist
mholden@businesscouncilab.com
Twitter: @MHoldenAB

Media Inquiries: media@businesscouncilab.com

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