An economist digs into Alberta’s budget

Our relationship with the provincial government is changing.

Today, when it comes to paying our bills, Alberta looks more like the rest of Canada than it did last week.

The government’s budget signalled it wants Alberta’s spending to look a lot more like our provincial counterparts. So, it’s bringing a history of runaway spending under control.

Instead of depending on energy revenue, or raising corporate taxes, more of the burden of paying for programs and services is being moved to Albertans — a fundamental shift in the province. 

The budget delivered by the Government of Alberta is a tough but realistic document that sets out a sensible plan to help citizens adjust to a reduced dependence on royalty revenues.

The problem

We’re spending beyond our means

In the new budget, the government drove home the point that spending on programs and services in Alberta is estimated to be $1,300 higher per capita than the Canadian average. So, it intends to bring program spending in line with the Canadian average, particularly in the health care and education sectors. Alberta’s spending on core programs in health and education are all higher than in other provinces. At 54 per cent, health and education make up the largest portion of the budget.

That has meant cuts to the bottom line for the health and education budgets, a major emphasis on absorbing population growth, salaries and other inflationary costs and a push to find better value for the money spent. The cuts are not so deep and with hold-the-line spending, are not likely to drive an already stressed economy into recession.

A combination of tax and fee increases, spending cuts and borrowing will have the budget balanced by 2018.

The plan is that after that, we will move to rely less on energy royalties and be able to save again. Whether the government will be able to hold the line on these commitments over time will be the biggest challenge.

The conversation at the water cooler now is likely going to be how much more we as Albertans are willing to pay for services. Albertans care about the value for money equation — it could be as simple as getting coffee at Tim Hortons or buying a new vehicle. The government says it will find value in the public service, but this process isn’t very well spelled out, and may take several years.

The slightly less flat tax

The government bid farewell to Alberta’s vaunted 10 per cent flat tax.

A move to a more graduated system of taxation means people who can afford to pay more will be paying more.

By 2019, Albertans who earn at $100,000 and over and earners at $250,000 and over can expect to pay an additional 1.5 per cent more in income tax. The additional amount of income tax paid at the $100,000 to $249,000 income level will be between $1,500 and $3,735. For people who earn over $250,000, the minimum additional tax paid will be $3,750. All of this is on a graduated scale starting in 2016.

Individuals are going to pay more. Companies are not.

There were no new taxes or tax increases for companies in the budget. As long as oil prices are low, companies will continue to see their bottom lines shrink. The government knows they’ll be receiving less in tax revenues from companies because of the economic slowdown. Asking companies to pay more now would be taking away cash from companies that could use it to continue employing Albertans.

On both the personal and corporate levels, Alberta retains its lead among Canadian provinces on tax competitiveness. This sends a message to investors that Alberta positions itself as a business friendly and low-cost tax environment. Even with the personal income tax increases, Alberta retains its lead over other provinces.

Health care

Then there’s the new Alberta Health Care Contribution Levy for everyone earning more than $50,000.

The levy depends on how much a person earns, and maxes out at $1,000. Instead of writing a monthly cheque directly to the government, the levy is taken as part of a person’s payroll contribution. This is the least costly way for the government to collect the money. And much like a savings deduction, which is automatic, individuals, won’t be reminded as immediately that this contribution is happening every month. Almost out of sight and out of mind.

No PST

Now ... a missed opportunity.

The province has once again unequivocally shunned a PST, despite urging among many economists to embrace it. From an economic standpoint, this was a missed opportunity.

A sales tax is easier to administer and can be applied on a broad cross section of goods and services. A one-percentage point sales tax could have meant as much as $1 billion in revenue. Some feel a sales tax is unfair to lower income earners, but exemptions or tax credits could have reduced that burden.

Instead, the government has opted for an Easter basket full of tax, premiums and fee hikes.

Taxes on gas, alcohol and cigarettes are up. Fees from motor vehicles, land titles, vital statistics (birth, death and marriage) are all up. While not large tax increases, they amount to several hundreds of millions of dollars for the government.

A sales tax might not have eliminated across the board tax and fee increases in this budget but a sales tax would cover most consumer purchases rather than on occasional and sporadic events. This may be more of a benefit to government than Albertans who disagree with a provincial sales tax.

Vulnerable families

With taxes, a health levy and fee spikes grabbing headlines, it’s important to note that down deep in the budget there are some measures to protect low-income families.

After July 1, 2016, $110 million will be provided to working families through the enhanced Alberta Employment Tax Credit (AFETC) and the new Alberta Working Family Supplement (AWFS).

That means families with working incomes up to $41,250 can receive benefits from both programs before they begin to lose their benefits. So, a family with four or more kids, can get up to $1,987 under one program, and $2,750 under the other. That’s real money. And for families with fewer kids, there are still benefits to be had.

Refundable tax credits put cash directly into the hands of families who can use the help. These are small, but significant measures in a province where one in 10 children lives in poverty.

Good debt

The doom and gloom talk around the budget, didn’t really pan out.

From a broad perspective, the government avoided deep spending cuts that might have driven the province into recession.

Further, though the loss of energy revenue has created a cash gap, the province’s fiscal accounts are in relatively good shape. Alberta has a lower of level of debt than most provinces in Canada and retains a healthy cash balance.

Because of this, Alberta has retained its triple-A credit rating. This is hugely important for how the government conducts business.

When the province borrows money for capital spending, say on new schools, roads or hospitals, or for deficit financing, it can do so at a lower interest rate. This is like having a discount credit card.

The rating is also a strong sign to international investors about how well the province is managing its business. Investment in the province means jobs for Albertans.

The future

Borrow now, pay later is not always a bad thing.

The government is dipping into our contingency savings account to keep our program spending largely intact. The alternative was higher taxes or deep spending cuts.

So the provincial government has put forward its renewed plan to sock away money in the Heritage Fund. While it might have been nice if savings had been made all along, the fact is these contributions were stopped many years ago. The energy revenue, which could have gone into the Heritage Fund, was directed towards general revenue. This is the story of how Alberta became dependent on non-renewable resource revenue.

In 2020, the government says it will begin putting cash into the savings fund to start re-building the principal — a long-awaited move for many observers calling on Alberta to stop sucking energy revenue into operating expenses rather than saving for the future. 

That’s not to say the Alberta government has always spent as economically as it could. For better or worse, Alberta chose to share the benefits of energy revenue with the current generation. Our Heritage Fund sits at $17.1 billion.

The hope now is that the province will stick to its plan to build it up in a way that makes sense for Alberta’s future.