Call it the Alberta Disadvantage.
It’s easy to describe. Combine a desire for spending on services with a philosophical aversion to collecting enough tax revenue to pay for them, while maintaining a very narrow tax base heavily dependent upon revenue from single commodity traded at a price beyond the government’s control. Then watch it all explode. As long as the price of oil is high, times are good in Alberta — money enough for everyone and everything, with no immediate pressure to put anything aside for the inevitable downturn. When that downturn comes, as it always does, the province whiplashes from profligate to penitent, with sharp cutbacks, higher deficits and deep uncertainty about the future.
That’s how they’ve been doing things in Alberta for a long time now. And when the whole thing crashes, it hits hard. Which makes it doubly strange to see a federal government doing the very same thing.
When federal Finance Minister Joe Oliver announced this week he would be postponing the federal 2015-16 budget until at least until April, he did so in the hopes that the price of oil will return to a level that will allow him to salvage at least some of his government’s pre-election fiscal strategy.
In doing so, Oliver signaled to the world that Canada is now Alberta writ large; federal finances are being held hostage to a single commodity traded at prices set far away. This is no accident. This is the result of a series of conscious decisions by the Harper government.
Alberta chose to narrow its tax base to a flat 10 per cent personal income tax rate on everyone. And because the province has no sales tax, the government is forced to rely on oil revenue to cover immediate operating costs.
The federal Conservatives moved in the very same direction — slashing taxes that funded operating costs and narrowing the overall tax base in a way that makes the budget balance far more vulnerable. Prime Minister Harper cut the GST by two points between 2006 and 2008. That’s roughly $12.2 billion in foregone revenue last year alone.
Imagine what we could have done with that money over the past six or seven years — better urban transportation, infrastructure to get underpriced western Canadian oil to overseas markets, a national electricity grid, projects to cut greenhouse gas emissions.
Then consider the Conservatives’ dizzying array of targeted tax cuts — for child fitness, apprentices and volunteer firefighters, to name just a few. Each is political, aimed at a slender slice of the electorate, giving small amounts of money to “hard-working Canadians”. None of the cuts generates significant economic activity — but, like the GST cut, they all narrow the federal government’s tax base. And these cuts don’t include the yet-to-be-implemented 2011 promise to double the value of tax free savings accounts and introduce an adult fitness tax credit at a cost of $3.2 billion over five years.
(It pays to remember that the commitment to a balanced budget this year is a political commitment. From an economic point of view, it’s irrelevant. Any good economist will tell you that it doesn’t matter whether the deficit is $2 billion or $4 billion — what matters is the ratio of debt to GDP. But this is what happens when politicians get tangled in their own rhetoric; Mr. Harper and Mr. Oliver have far too much invested in that rhetoric to back away from it now.)
Finally, the crowning folly: last fall’s series of tax announcements, spending money that the government didn’t have and, as of now, can’t get. As TD Economics noted in a report this week projecting at least two more years of deficits, income-splitting, the expanded universal child care benefit, the new child care expense deduction and the doubling of the child fitness tax credit will cost almost $27 billion from 2014-15 to 2019-20.
When the surplus was projected at $28.3 billion, a case could be made for that kind of spending spree. TD now calculates that lower oil prices put that cumulative surplus before the spending announcements at just $12 billion.
Some or all of this could be covered by the $3 billion contingency reserve. Under the Mulroney Conservatives that contingency was used for whatever came along — farmers facing drought, shipbuilding assistance and other projects. The contingency became the way to respond whenever the government faced demands from interest groups for money to offset unexpected events during the year. Meanwhile, the annual deficit never sank much below $30 billion — despite repeated vows that it would be eliminated within two years.
When the Liberals came to power in 1993, Finance Minister Paul Martin changed the nature of the contingency fund. He set a rule allowing its use only when interest rate projections turned out to be wrong and debt service costs rose higher than expected. Otherwise, the $3 billion would be used as a small annual down-payment on the national debt. If unexpected problems came up during the year government departments would have to solve them within their own budgets. It was a good rule.
Apparently, the contingency fund will be used to cover the shortfall in federal government oil-based revenue — but we still don’t know how that will work. Will it cover the $550 million a year lost through the cut in small business EI premiums in 2015 and 2016? What about the $1.3 billion in new infrastructure spending announced by Prime Minister Harper after the fall economic update? What will that leave to offset lower oil prices? Or will it all be allocated for that purpose?
And lurking behind the short-term political calculations about deficits and surpluses is the issue of the country’s long term debt — which no one seems to want to talk about. Interest rates are expected to start rising again over the next year, increasing the cost of servicing debt.
Canada’s national debt now stands at $665 billion. It was $417 billion when the Conservatives came to power in January 2006.
Like Alberta, the federal government’s fiscal health is now handcuffed to oil prices to a degree that we’ve never seen before. It’s the opposite of ‘sound fiscal management’ — it’s loose math based on wishful thinking. The new fiscal year will begin on April 1 without the government presenting a budget to Parliament. It’s been more than two decades since that has happened in a normal parliamentary year.
When the budget is released, Mr. Oliver says it will be balanced. That could be accomplished by further cuts in government spending but, as the TD report notes, “operating expenses are currently at an all-time low as a share of the economy, and history has shown that a prolonged low level of program spending is generally unsustainable and ultimately leads to rapid spending growth down the road.” In other words, another short-term fix to conceal a deeper problem.
It sounds a lot like Alberta’s boom and bust cycle. The Conservatives have taken the Alberta Disadvantage national.
This piece was original published in IPolitics. Christopher Waddell is an associate professor and director of Carleton University’s School of Journalism and Communication in Ottawa. He also holds the school’s Carty Chair in Business and Financial Journalism. He is a veteran of the CBC and Globe and Mail newsrooms and now works with iPolitics as an associate editor.