Cuts are unnecessary!

It’s all about choices

In the end it’s all about choices.

We have the means to be at the top of the pile – and to make the investments needed to keep us there. But are we willing to summon the political will to make it happen. Can we find the courage to stand up to the skeptics who want us to think small and who keep looking backward for future policy directions?

No other province in Canada has the potential that Alberta has to build a better and brighter future. Together, let’s find a way to realize that potential!

Alberta can still afford to invest in its people and communities

Even with the global recession putting a squeeze on revenues, Alberta is in better financial shape than almost any jurisdiction in the world.

We still have no debt and the temporary cash shortfalls that have been caused by lower commodity prices can easily be covered by the billions that have been squirreled away in rainy-day funds.

Alberta also has, by far, the lowest tax rates in the country for both individuals and corporations. As a result, we have far more options when it comes to finding new revenue sources than other jurisdictions.

In other words, there is absolutely no good reason for the government to be considering deep cuts — especially when those cuts will cause real pain for Albertans and will almost certainly weaken our province’s future economic prospects.

Debunking the myths used to justify cuts

In the 1990s, the Klein government used the argument that Alberta was about to “hit the debt wall” to justify unprecedented cuts to public spending and public services.

This time around, however, Alberta’s financial situation is much different. In fact, there is probably no other jurisdiction in North America better positioned to ride out the recession safely than Alberta.

Despite this fact, two myths continue to be advanced by advocates of Klein-style budget cuts.

The first myth is that spending on public services is spiralling upward and needs to be brought under control. The second is that in the face of declining resource revenue, the Alberta government has no choice but to cut spending.

It’s worth everyone’s while to look at these arguments in detail to see if they have any merit.

Myth #1: Out of control spending

It’s true that spending on public services and public infrastructure has increased in Alberta over the past few years. But most of the increases can be attributed to Alberta’s rapidly rising population and the need to make major investments in public infrastructure that had been badly neglected for more than a decade under former premier Ralph Klein.

Even with the dramatic increase in infrastructure investment recorded over the past few years, overall public spending has not been out of line with spending in other provinces.

In fact, a recent study by the University of Alberta’s Parkland Institute shows that over the past nine years, Alberta has, on average, ranked sixth among Canada’s ten provinces in overall public spending. When it comes to the big-ticket health care portfolio, Alberta has spent even less: ranking eighth among provinces on average over the past nine years.

The author of the Parkland study, professor Mel McMillan of the U of A’s Business Faculty concluded that, given its status as Canada’s wealthiest province, Alberta’s spending on public services and social programs has been “embarrassingly average.”

A recent report prepared by the Alberta Federation of Labour came to the same conclusions.

It shows that inflation-adjusted per capita spending in Alberta declined sharply in the 1990s, and rose only gradually over the past five years. The relatively sharp increase for the year 2008 reflects the government’s decision to reinvest in badly needed public infrastructure. Such spending was and continues to be necessary: allowing this infrastructure to further deteriorate would be a disservice to the public, and a hindrance to economic growth. Overall, the evidence clearly shows that public spending in Alberta is not “out of control.” If anything, our spending on health care, education and other important public services is below where it should be.

real-per-capita-spending-AB_1989-2008

Myth #2: Alberta has no options

The recession and the drop in commodity prices has, indeed, had a negative impact on government revenue here in Alberta. But the hole in the provincial budget created by the recession is smaller than Albertans have been led to believe — and it’s getting even smaller as the global economy returns to health and prices for oil and gas increase.

In other words, the trends that led people like former Finance Minister Iris Evans and Treasury Board Secretary Lloyd Snelgrove to muse about the need for deep budget cuts over the summer are reversing themselves. The justification for a return to Klein-style cuts just isn’t there.

It’s raining – so it’s time to use our rainy-day funds

Another related reason why the provincial government shouldn’t allow panic to stampede them into making deep budget cuts has to do with the nature of the current deficit. To put it simply, it’s not like the deficits of old. In the past, when the provincial government’s spending exceeded its income, they had to cover the difference by borrowing (in other words, traditional debt financing).

But this time around, the government has been able to cover its short-term, recession-related revenue shortfall by drawing upon the billions of dollars that have been socked away in rainy-day funds, most notably the Sustainability Fund.

As a result, the current and projected deficits are not creating debt for the province. We are simply dipping into saving that have been set aside to help us get through recessionary times exactly like the one we are living through today. What’s the point of having a rainy day fund if people are afraid to use it when it’s raining?

Alberta has options cuts don’t have to be the only answer

Of course, some spending skeptics will argue that it’s too early to predict the end to the recession and a return to stronger energy revenues. But even if energy prices stagnate or fall again, there is still no compelling reason to proceed with deep cuts. That’s because Alberta has revenue options that would make other, more cash-strapped, jurisdictions green with envy.

Most importantly, Alberta has for years been using its massive energy revenues to subsidize a tax regime characterized by extremely low taxes for both individuals and corporations.

In recent years, as much as thirty per cent of provincial revenue has come from resource royalties – a figure that no other province comes close to matching. This is great news for Albertans when energy prices are high – they’ve been able to enjoy similar levels of public services as other Canadians at a much lower cost. But it’s bad news when energy prices plummet, because it leaves our schools, hospitals and other vital services exposed.

The answer, then, may simply be to revamp Alberta’s tax system to reduce our over-reliance on inherently unstable energy revenue.

In a recent report, the Parkland Institute pointed out that by replacing Alberta’s 10 per cent flat tax with the same progressive tax system that was in place during the Lougheed era and the early Klein years the provincial government would generate $5.5 billion more in revenue.

The beauty of this proposal is that the vast majority of Albertans wouldn’t pay a cent more in tax than they do now — but enough money would be generated to wipe the current deficit out entirely.

Tax changes are always a tough sell — especially in Alberta. That’s why Premier Stelmach ruled them out over the summer. But Albertans understand that you get what you pay for. And if you have a cut-rate tax system and declining revenues from other sources, what you’ll get is cut-rate education, health care and other services.

Time for new approaches

So, if there’s one positive lesson that should be learned from this recession, it’s that the Alberta government needs to consider new approaches to revenue generation — approaches that would allow us to maintain high quality services such as education and health care, even in the face of fluctuating commodity prices.

The good news is that Alberta has a lot of room to manoeuvre. As we can see from the chart below, we spend far less on public services as a proportion of our provincial income (GDP) than any other province in Canada.

prov-govt-revenue-vs-spending

No one is saying that we should follow the lead of Quebec or most of the Maritime provinces who are spending 25 percent or more of their provincial GDPs on public services. But if we bumped our spending up a few notches – say, to 16 or 17 percent of GDP – and if we financed those increases with a return to a progressive tax structure, then there’s almost no doubt that we could afford the best schools, the best health care, the best infrastructure and the best supportive services in the country.

It’s all about choices

In the end it’s all about choices.

We have the means to be at the top of the pile – and to make the investments needed to keep us there. But are we willing to summon the political will to make it happen. Can we find the courage to stand up to the skeptics who want us to think small and who keep looking backward for future policy directions?

No other province in Canada has the potential that Alberta has to build a better and brighter future. Together, let’s find a way to realize that potential!

 

 

 

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