Friday, March 08, 2013

Has Alison Redford Lost Her Nerve?

Yesterday's awful Alberta budget, which pussyfoots around the deficit issue by dividing the budget into three separate accounts, avoided  both raising taxes and having massive across-the-board cuts by going  into debt. To be precise, $4.3 billion in infrastructure borrowing plus a $2 billion operating deficit.  Universities that had been  led to believe that there would be a  2% increase in their budgets this year instead face a 7.2% cut. Other non-health areas are basically frozen, although the threshold for achieving seniors benefits is being raised ( a move that Redford may end up regretting).

There is a consensus among economic experts  that we are overly dependent on energy royalties, and there is a near-consensus that the royalties themselves are too low.  We had already depleted our Heritage Trust Fund, and now we have drained the Sustainability Fund. And we need more revenue to build infrastructure for a province that is expected to add a million  to its population.  Redford knows this, and at various times has said as much. She has also been explicitly critical of Ralph Klein's neglect of infrastructure spending  and has invoked the memory of Peter Lougheed and the need to replenish the Heritage Trust Fund.  So why isn't she doing the right thing and raising some tax revenue?

The political calculation appears to be that the best way to minimize the political costs is to rack  up debt and put it in a separate capital account.  Perhaps this seems justified because  the Wildrose Alliance could score more points against the government in the short run if there were tax increases. But that does not address the real underlying problem.We won't wean ourselves off dependence on energy revenues through borrowing. Borrowing should be kept at a modest, manageable level by balancing them with revenue increases from a non-energy source. And I am willing to bet that Redford will do better politically if she does the opposite of this ridiculous tap-dance and  starts levelling with Alberta's citizens.

Redford should be able to effectively defend a progressive income tax, given that the flat tax is clearly a luxury that we can no longer afford, given that no other province has a flat tax, given that the majority of Albertans (those earning less than $70,000) would likely be better off, and given that there is such an impressive intellectual consensus from all corners of the ideological spectrum that either progressive  taxes or sales taxes should be re-instituted.

Of course, there is a problem caused by the messages sent by Redford during last spring's election campaign.  She may have painted herself into a political corner by predicting a balanced budget on the basis of only mildly conservative revenue estimates. This revealed  a flaw:  it doesn't make sense to have a Klein-like dependence on energy revenues without a Klein -like low-balling of revenues.  The resulting half-way house is an unstable structure, politically as well as economically.

This government still has time to get itself out of this unsightly mess. It may actually be politically wise to spend a year imposing restraint on the spending front so that Albertans can be made more aware  of the costs of cuts, before trying to persuade them of the need for a progressive income tax (or a medical care premium, higher corporate taxes, or higher royalties). So, perhaps this government will fully correct its course in next year's 2014 budget.

The premier should relish the thought of taking on Danielle Smith. The latter is more telegenic and possesses the more formidable personality, but she does not have the strongest arguments. The majority of Albertans can be made to rally behind Redford -- if she is willing to take a stand.   In my estimation, she has about a year to do this. At most, two years.

If she doesn't--and continues to send a mixed and confusing signal that pleases almost no one--she will almost certainly lose the next election to Danielle Smith and the Wildrose Party.  Alberta deserves a clear, fiscally lucid government that is as true to the legacy of Peter Lougheed as the Wildrose Party is to the legacy of Ralph Klein. 


why_knot1 said...

Redford has drained the Sustainability Fund, not the Heritage Fund. That being said, the Heritage Fund is worth less, adjusted, that when deposits were stopped, and less than the Sustainability Fund when the raiding started.

As for Redford trying to use the old Klein divide and conquer tactic, it must be that, getting rid of the supporters that won her the leadership and the election so that she does not face their wrath at her leadership review, playing the cards her funders dealt or sheer incompetence.

I suspect a combination, but worry that I might be giving her too much credit with that conclusion.

Mark Crawford said...

Thanks for your comment--at your suggestion I clarified that she had not drained the Heritage Fund.

I just want to stress that keeping Klein like taxes and dependence on oil revenue cannot coherently be combined with a more centrist approach to estimating revenue and building infrastructure.
She should address the revenue problem, after a year of exploring whatever grain of truth there is in the 'overspending' argument.

In my view, a modest progressive income tax that rakes in $2 billion is the best way to go. We would still have the lowest taxes in Canada by a wide margin.