Thursday, August 27, 2009

Alberta's Revenue Problem

Alberta's first quarter fiscal update was released this week and the news wasn't good. Alberta's deep reliance on resource revenues has forced the government into a harsh $6.9B deficit. With Ed Stelmach's backtracking on royalty rates and refusal to look at different tax structures, Alberta is left staring down the barrel at service cuts.

Given the economic boom that Alberta has experienced recently, there is no need for cuts to health care and education. First off, if we had a sustainable progressive taxation system, then we wouldn't have to worry about dropping energy prices effecting our public services. Secondly, if we had more lucrative royalty rates, we would have a much larger sustainability fund to draw from. Sure the boom wouldn't have been as dramatic, but then the bust wouldn't have hurt so much, either.

All in all, I consider this to be a revenue problem. The problem being, we rely on volatile revenue to deliver essential services - and that's no way to run a government.

Scott Hennig, leader of the most misrepresentatively named lobby group in Alberta (The Canadian Taxpayers Federation), argued with me recently on Twitter about my assertion that we have a revenue problem. He says we have a spending problem and pointed to dramatic increases in government spending since 2005 (near 11% per year, on average).

I decided to crunch some numbers to get a handle on the information. This graph shows the Alberta government's expenses and revenues on a per capita basis, adjusted for inflation (2002 dollars).

Government spending was slashed significantly in the mid 1990s under Premier Ralph Klein. It has only risen recently and it is still not at the level of service Albertans were experiencing before 1993. It is also noticable that the spending is reactive to fluctuations in revenue (driven by resource prices). The cuts in 2002 are only because revenues dipped in 2001.
Sure, spending increased since 2005, but much of that spending was on infrastructure that was neglected throughout the 90s and the early part of this century. The levels of delivered service is still well below what it was in the 80s - wait lists in health care are long and class sizes are large!

Here's another interesting look at government spending. This graph shows Alberta government and expenditures as a percentage of Gross Domestic Product.

In the early 90s government spending was in the 22% range, then under Ralph's reign it plummeted to near 13-14%. It stayed around there until 2002, where it took another hit and dropped to the 11.5% range. It has remained between 11 and 11.5% since 2004. What I find particularly interesting, is that government will reduce expenses whenever the economic climate justifies it, but does little to improve service when we are in a position to do so.
By comparing spending to GDP, we have a real sense of how much we are living up to our potential. As Alberta becomes more prosperous, should we not be allocating more resources to social services?
Ultimately, it comes down to this: We have great potential in Alberta to be one of the best places in the world to live - to ensure that everyone is looked after and prosperous. Instead, we don't plan and we squander our resources.


Ken Chapman said...

What a great piece of work - thanks for doing this. I have to pour a glass of wine and think about implications. You have done something very important here.

Maryanne said...

Fortunately I did pour my glass of wine before reading so I am able to quickly more onto thoughts of implications. Seriously it is great information. Thank you for all your work.

Mark said...

This is an excellent article that I wholeheartedly agree with. The one point I feel compelled to bring up is with regard to the *right* method we should be using to bring in that revenue.

Much is being made of the idea to bring back health premiums (I am hearing this in the public and media often now), but let's remember that premiums were hardest on low-income Albertans.

If it's taxes we need to increase, then let's do it through the system that *most* people agree is reasonably equitable.

Thanks once again.

Atypical Albertan said...

Thanks for the fantastic comments. The implications are considerable.

I wholeheartedly agree with you Mark, health care premiums are an inappropriate regressive form of taxation. I think we need to seriously look at Corporate taxation rates. (If we funnel money down to lower income individuals, it will get spent and businesses will benefit). I also pulled some data on that, but the trends weren't as clear as the data pieces I did post.

Mark said...

Hi again,

I'm posting a question on behalf of a friend who doesn't have a google acct.

"Great article and information - thanks! Is there a comparison of corporate tax rates in Alberta as compared to corporate tax rates with other jurisdictions in North America? And is there a graphic you know of that shows corporate tax revenue as a share of GDP/total tax revenue? I'm also wondering about whether there is any information on the tax generated by the different quintiles and comparisons with other provinces - I'd read somewhere that the lower income levels pay closer to what people in other provinces pay while the higher levels pay significantly less and that the difference gets greater as people earn more."

Mark said...

I failed to mention my friends name is Manish.

why_knot said...

This is a very good analysis, however, in my humble opinion, the larger question is where is the spending being made?
It surely is not in the actual program delivery, nor is it in social infrastructure.
New schools remain unpaid under P3 contracts, as do major road projects.
AISH still offers below poverty level support to the disabled, and health benefits for seniors face significant cost increases to Albertans.
Long term care facilities are not being built, but government grants go to corporate supportive or assisted living accomodations.
$100 million is still being doled out to pet projects under the Rural Alberta Development fund, and millions, if not billions have gone to financial assistance to O & G (see post on Thursday, May 14, 2009
48 cents a barrel
The government chooses to pour millions into projects of friends like Bern Kotelko (Highland Feeders, Highland Renewables, Hairy Hill and more including his daughter's organic beef farm). One of the one-shot Chrapko brothers of multi-million dollar pre- bust is now partnered with the Kotelkos.
There is much, much more for the public to understand about how spending got so out of control, and how Alberta became a Banana Republic in 16 years.