Friday, April 03, 2015

The REAL Problem with Jim Prentice's 2015 Budget

The "historic" Prentice budget is an historic missed opportunity. Instead of simply and boldly correcting a regressive tax system that relied too much on nonrenewable resource revenue to subsidize current consumption (both public and private) -- something that could have been done simply by returning to the personal and income tax rates  that were in place before 2000-- the government nickel-and dimed the taxpayers with increased fees and minor tax increases. While a graduated approach was recommended by government economists (on account of the fragility of the provincial economy) -- even by 2018-2019 the income tax system will only generate about $730 million more in revenue.  When you take inflation, economic growth and population growth into account , that means that the goal of building up the Heritage Trust Fund will still be critically dependent upon a substantial rise in oil prices.

We should all welcome Premier Prentice's commitment to getting off the energy-revenue roller-coaster and his plans to replenish Alberta's savings. But two things bothered me about  the premier's pre-budget TV broadcast and Finance Minister's speech last week.  First, he gave sketch of Alberta political history that commended Premier Lougheed for creating the Alberta Heritage Trust and Premier Klein for his "financial rigour" and implied that Alberta's fiscal problems were created elsewhere by less responsible politicians. This does not accord with my observations. Ed Stelmach was committed to correcting the infrastructure deficit that was hugely evident in the mid 2000s. He also tried to correct the problem of royalty rates that were 20% too low according to several expert studies. These were problems he inherited from the Klein government and from nowhere else.  Alison Redford , like Stelmach suffered from a lack of support in caucus and a fear of the Wildrose Alliance; she was likewise incapable of following through on a corrective strategy because a proper corrective strategy means confronting the uncomfortable truth that "real"  fiscal conservatism (of the kind exemplified by Ralph Klein) is the problem.

The second thing that bothers me about the Prentice government's approach is that, when I look at the factors that made an energy revenue savings strategy work in Alaska and Norway , what really stands out is presence of bi-partisan support in the former and formal all-party agreement in the latter.  Could even the Wildrose Alliance sign a declaration committing to restoring the Alberta Heritage Trust, while agreeing to disagree about whether those savings should come from reduced spending  rather than increased taxes?  The Government should strive to get all parties in the Legislature to commit to such a proposition; but since this is Alberta (and there will always only be one party in power) it simply does not bother.

Instead of trying to pander to people like Lorne Gunter, Prentice should have the courage to point out why they are wrong.  Stelmach and Redford weren't the problem; they failed to correct the problem created by Ralph Klein and Stockwell Day. The latter increased our dependency on the nonrenewable energy-revenue roller-coaster and created an infrastructure deficit. Gunter focuses on the least-meaningful stats (total spending) and ignores the most meaningful ones (spending in relation to GDP, spending per-capita).  There should be an intelligent consensus that a substantial proportion of non-renewable energy revenue be saved -- then people on the left and right can argue about whether those savings should come from spending cuts or tax increases. Government economists advised Prentice that going too hard in either direction at this time  could push a fragile economy into recession, and he was wise to listen to them. Another thing to bear in mind is that counter-cyclical funding for infrastructure and for higher education is a smart thing to do, especially if you  happen to live in a province that has a below average participation rate in higher education and at a time when interest rates are historically low.

By catering to Klein's personal popularity, and  by failing to gain all-party consensus for the idea of committing at least half of energy revenue to replenishing the Heritage Trust Fund, Prentice may be failing to entrench Alberta's collective commitment to saving.  That means that the policy could change when some future leader decides that it is politically more expedient to offer tax cuts instead of collective savings and investment.  In other words, history may be doomed to repeat itself.


Bernard von Schulmann said...

In the last ten years, the era of the oil price boom, Alberta did not contribute to the Heritage Fund but increased government spending. If over the last ten years Alberta's per capita government spending had stayed similar to BC and Ontario the government would have spent $56,000,000,000 less.

All this money could have gone into the Heritage Fund and pushed it up to $70,000,000,000 in capital giving $2,000,000,000 in annual interest income. Instead all the extra money was all spent for comparatively little gain.

Alberta over the last decade arguable had the most badly managed finances of any Canadian province in decades.

Mark Crawford said...

FAir enoughcomment. THe Fraser Institute and the WIldrose ALliance like to focus on absolute increases in spending--because of Klein infrastructure deficit, the rapid growth in population,etc. I do not think that it was inappropriate for ALberta's total nominal spending to have grown more quickly than elsewhere. ALberta fundamentally has more of a revenue problem than a spending problem.

Mark Crawford said...

P.S> By way of summary--While I was initially excited about Prentice's announced plan to eventually replenish the Heritage Savings Fund, both the economic and the political legs of that plan are far too shakey. On the economic side, $ 2.7 billion in additional revenue is probably only about half of what is really needed to get off the roller-coaster (the government's budget plans appear to assume oil getting back up to over $80 per barrel), and there are lots of options for achieving that would still leave Alberta the least-taxed jurisdiction in the country. ON the political side, by leaving the myth of Ralph Klein untouched, and by not getting an all-party consensus on a savings strategy like Alaska or Norway, there is a real danger of that savings goal un-raveling as soon as conditions change.