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, looks at Alberta’s historical performance of, and approach to, fiscal management, including an examination of our over reliance on resource royalties, and explores some broad options to tackle this big challenge—from aligning expenses with comparator provinces, to a discussion of new revenue options, to ways to grow our economy and therefore tax base.
Now, in the middle of a crisis and deep recession, is not the time to be making big structural changes, either deep cuts or new taxes. But now is the time we need to take a clear-eyed look at our trajectory and start making plans, before the problem gets so big that we run out of options.
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- an outdated mythology about being home to no provincial consumption tax.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 address all three levers of expenses, revenues, and economic growth.
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.
We also believe that, as the province continues to struggle with the impact of the pandemic, now is not the time to introduce major fiscal changes, including changes to spending that could further hurt those already struggling and changes to implement a new revnue model.
What we must do now is take a clear-eyed examination of Alberta’s fiscal challenge, explore the various options, and chart a course to shape Alberta’s fiscal structure into one that is competitive, sustainable and stable. We must do this to avoid the most severe economic and social impacts and help build a prosperous province for our children and grandchildren.
What Should Be Done: Our Recommendations
Alberta’s return to fiscal sustainability will require three concurrent paths: addressing expenses, re-imagining the revenue model, and sparking economic growth in a post-COVID-19 recovery.
Addressing our expenses
The MacKinnon report, released in September 2019, provides several recommendations to the province to bring its spending in line with its peer provinces. The provincial government has begun on this step, with a plan to hold most non-pandemic spending flat.
When the time is right, our first course of action should be to get our expenses in line. Albertans deserve to get value for their tax dollars at similar levels to other provinces, and today they do not.
Re-imagining our revenue model
The reality is that our research shows cutting spending alone will not be enough; we must also address our revenues.
Once progress has made to address expenses and we are through the pandemic, Alberta should turn to re-imagining the revenue model and sparking economic growth.
When we talk re-imagining Alberta’s revenue model, it’s not about layering on. Correctly done, it possible we can shift the revenue mix to lower taxes in the most important areas—such as taxes that disproportionately impact the vulnerable or impair job creation—while making the province more competitive and attractive overall.
Tax reform and modernization could help increase and stabilize revenue and stimulate economic growth. We have detailed two of the many options worth discussing in this preliminary report.
Harmonized Sales Tax
A stable source of revenue, an HST could provide an immediate revenue boost to Alberta. The province remains the only jurisdiction in Canada without an HST. An HST may also allow the lowering of other, more economically damaging taxes.
Alberta Consumer Carbon Tax
While the federal carbon tax is currently being challenged in court, and any decision on what to do next must follow that decision, if a federal tax remains in place, Alberta should consider taking control of it. 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.
Enabling economic growth
Economic growth is the long-term pathway to both prosperity and fiscal sustainability. It must be our priority. Government revenue growth is closely tied to growth in the provincial economy. Strong economic expansion creates jobs, raises wages, and increases corporate profits.
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 and options to repair Alberta’s fiscal model and restore fiscal health. Over the coming months, we will be exploring additional options and policies in greater detail and will release detailed recommendations later this year.
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We have compiled a series of resources—from news articles and op-eds to policy analysis and academic research—to help you explore this topic in greater detail.
- PODCAST: Episode #032: Alberta’s Spending & Revenue Problem—Examining the Provincial Fiscal Model and How to Fix It
- Provincial Debt Sustainability in Canada: Demographics, Federal Transfers, and COVID-19
- Making the Best of It: Options for Carbon Levy Revenue in Alberta
- Opinion: Ottawa needs to pay more attention to these red flags on provincial debt
- Alberta needs to get real about its fiscal challenge
- Alberta’s advantage in generating tax revenues over the rest of Canada nearly non-existent now
- Alberta downgraded by credit rating agency