December 2, 2012
EDMONTON, AB, Dec. 2, 2012/ Troy Media/ ? Last week,?I identified what aspects of provincial government finances are within the control of the provincial Cabinet and Treasury Board and what are not. This column examines how the levers of provincial finance might be used to address continuing deficits.
Revenue
The government has the ability to change the rate and basis of taxation on persons and businesses. Alberta?s low tax regime, reported on in provincial budgets, is enviable. If Alberta taxed at the levels of the next lowest taxed province ? British Columbia ? it would enjoy an extra $12 billion in revenue, due chiefly to the absence of a sales tax. This fiscal policy choice has both positive and negative consequences. For each one per cent of a sales tax, Alberta is foregoing over $700 million in revenue. However having no sales tax supports the highest retail sales per capita in the country. Still, it?s hard to justify the government?s position of no sales tax as a fundamental right of Albertans when legitimate spending pressures surface. Such a tax is normally viewed as penalizing low income families but these objections can be addressed with tax credits.
Albertans also enjoy one of the lowest personal income tax rates, especially for high income earners. A one per cent rise in the personal income flat tax would generate an additional $870 million per year.
Other sources of revenue could include higher ?sin taxes? including liquor, gaming and tobacco. These currently generate about $3 billion. Increases could be justified by future reduction of health expenditures as price-sensitive drinkers, gamblers and smokers kick the habit or scale back. Another potential source of additional revenue is the re-introduction of health care premiums abolished by the Stelmach government. An exemption for low income families would address objections that such a tax is regressive.
Two other possible revenue sources would be carbon taxes on emitters and on motorists. Higher taxes would discourage consumption and discourage investment. The current levy of $15 per tonne on large carbon emitters, which is being used to advance research commercialization on climate change technologies, might be used to fund programs to reduce carbon emissions. Research presented at a conference this past May showed that the burden of a significant carbon tax would not be too large even on oil sands operations. Such a bold move would demonstrate Alberta?s leadership in Canada.
To conclude on the revenue side: Albertans should demand that their government clearly articulate the rationale for its choices for its revenue structure in relation to choices about spending and resource savings.
Expenditure
With the exemption of debt servicing charges, inflation-adjusted per capita spending by the Alberta government is near the top when compared to other provinces. Some argue that, in Alberta, spending as a percentage of GDP or personal income is lower than other provinces therefore government is arguably under-spending in many areas. For some, this high spender status is justified based on higher revenues that the province receives because of resource rents and high tax yields based on high income levels for persons and corporations.
High spending levels are particularly pronounced in capital spending on roads, hospitals, schools and other infrastructure. Indeed, provincial budget documents since 2005 have highlighted that Alberta per capita capital spending is about 1.5 times or more than that of other provinces. This area requires tighter controls on priority setting.
A recent book by former Alberta Liberal leader Kevin Taft shows that spending on health care and K-12 education in 2009 is higher than the average of other Canadian provinces. Other higher spending areas include transportation and communications, post-secondary education and housing. On the other hand, spending on social services was lower by nearly $500 per person.
The government, in order to determine the effectiveness of its spending, is undertaking program reviews called ?results-based budgeting.? This action is commendable, but the public should be expecting that their government will make the difficult choices to ensure the most effective use of every dollar expended. The public should also gird itself to some programs being eliminated or scaled back.
The Alberta government has many policy tools to address the deficit.
But is the deficit a spending problem or a revenue problem? Most persons would see the solution as a little of both. It is our politicians who make the decisions on public spending and taxation levels. These decisions are difficult ones but they need to be addressed now.
Most importantly, a sustainable budget system must be built on the recognition that resource revenues are volatile. In both the short and long term, revenue depends on prices, industry costs and production levels that are largely beyond the province?s control. A sustainable budget system must therefore include (1) savings to address volatility of revenues from year to year and (2) long-term ?savings plan? insulated from short-term political raids so that our children and grandchildren are left financial assets to offset the inevitable decline of our energy resources.
Bob Ascah is Director of the Institute for Public Economics at the University of Alberta
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