Calgary·Opinion

Tombe: Neither the NDP nor the UCP offer the detailed fiscal plans Alberta needs

“Whatever the route forward, Alberta faces difficult choices ahead.” Economist Trevor Tombe looks at the different financial proposals in the provincial election.

Both should do better

Both the UCP and the NDP are committed to balancing the budget within the next four years. (CBC)

EDITOR'S NOTE: This is one opinion. Under the heading Opinion, we are carrying a range of different points of view on the issues facing Albertans during the current election. You can find them on our Alberta Votes 2019 page.

Neither the NDP nor the UCP offer the detailed fiscal plans Alberta needs.

Still recovering from an incredibly deep and long-lasting recession, Alberta's fiscal and economic situation are central issues in the province's ongoing election.

Both parties are committed to balancing within the next four years — the UCP by 2022, and the NDP by 2023. But how they plan to do this was a big unanswered question.

Their full platforms offer few answers.

First, full disclosure: I am not currently doing any work, paid or unpaid, for any political party or individual. In 2017, I provided paid analysis for the Government of Alberta related to CCIR design. In 2018, I was also a member of the government's Market Access Task Force.

The platforms

Both parties fit their entire fiscal plans onto a single page.

There's precious little guidance for Albertans on short-term choices. And no attention paid at all to our longer-run challenges, from an aging population to getting off the royalty rollercoaster.

Despite the lack of detail, two distinct visions for Alberta are clearly apparent.

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The UCP will lower taxes, freeze spending, and fight Ottawa.

The NDP will grow spending modestly, and pray royalties return to historic highs.

Adjusting for inflation, both parties propose to shrink the size of government spending per person, though by different amounts.

Tombe plots each party’s revenue projections. (Submitted Trevor Tombe)

In blue, I plot each party's revenue projections.

The NDP is more optimistic (I'll come back to this), and the UCP contains some tax reductions that lower revenue below their more conservative baseline projection.

In red, I plot the planned level of government expenditures per person.

The NDP will increase spending per person, then decrease to balance by 2023, while the UCP will decrease per person spending each year to balance by 2022.

Are the plans credible? What will each mean for Alberta's public services? And for our taxes?

With what little information we have, I'll try to unpack their plans.

The UCP Plan to Balance

The UCP plan involves two major tax cuts and a sustained freeze in total government spending. It hopes to achieve a $714 million surplus by 2022.

Alberta UCP leader Jason Kenney attends a press conference at Total Energy Services in Leduc Alta. on Tuesday, March 19, 2019. THE CANADIAN PRESS/Amber Bracken (Amber Bracken/The Canadian Press)

This is ambitious, and like any difficult policy choice, it comes with tradeoffs.

First, the tax cuts.

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Alberta has two carbon taxes. The UCP proposes to scrap one of them (the one at the pump and on our heating bills). They will keep the second (larger) carbon tax on heavy emitters, but shrink it from $30 per tonne to $20.

Overall, both changes lower government revenue by $1.9 billion annually by 2022.

The UCP also propose to cut corporate income taxes from 12 to eight per cent.

Originally, the UCP suggested this tax cut would pay for itself. "This is a recipe for more, not less, government revenue," said Jason Kenney earlier in March.

In my opinion, this was not credible.

While the move is likely to increase economic activity, that isn't — in most cases — enough to actually increase government revenue.

But the proposal and expectations seem to have changed.

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The party platform (to their credit) now estimates only about 40 per cent of the foregone tax revenue is recovered from increased economic activity. Rather than paying for itself, they anticipate a $1 billion revenue loss.

That's reasonable.
Tombe calculates foregone revenue from a lower corporate tax rate. (Submitted Trevor Tombe)

Though it undermines a key talking point for the rest of their campaign, it introduces more honesty into an important campaign debate.

With nearly $3 billion fewer dollars of government revenue by 2022, the UCP plan requires significant spending restraint to balance the books.

Specifically, they'll freeze operating spending at $49 billion annually until 2022.

With population growth over that time expected to be over six per cent — and factoring in expected inflation adding eight per cent to prices — this amounts to a real reduction of 14 per cent per person.

For perspective, a 14 per cent reduction in per person spending would amount to $8 billion this year.

To compare this with the past, the current UCP proposal would work out to about half the per person spending reductions that Albertans saw during the Klein years of 1993 to 1997. This is big.

Of course, there are other less ominous ways to frame their spending plan. It would bring us roughly to where B.C. and Ontario program spending are today.

And to where Alberta was a little over a decade ago.

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Some will call it a cut, others will say it's a freeze. But this framing largely misses the point.

We should instead ask ourselves where government should or shouldn't spend, and whether each individual initiative is worth the cost. If so, the spending is appropriate. If not, the spending should be cut.

But on where and how they plan to achieve the savings, the plan is largely silent and provides no detail at all.

They're not alone.

The NDP Plan to Balance

The NDP fails to lay out a credible plan to balance by 2023.
NDP Leader Rachel Notley announcing her party's platform in Edmonton on Sunday. (CBC/Scott Neufeld)

They sketch a goal even less credible than what they provided in last year's Budget 2018.

Most concerning of all is their continued reliance on optimistic resource revenue growth to balance.

Their plan requires $12 billion in resource revenues by 2023/24 to balance.

This does nearly all their heavy lifting — accounting for 85 per cent of the deficit reduction.

The remainder is from modest spending restraint — equivalent to a three per cent real per person reduction in operating spending. Less than the 14 per cent reduction proposed by the UCP, but if revenue growth disappoints then further spending restraint is in the cards.

If royalties increase to only $9 billion, say, by 2023/24 (my own estimate of a reasonable growth), then real per capita spending reductions by the NDP would need to be nine per cent (instead of the proposed three per cent) to balance by 2023 — more than I suspect they'd be willing to accept.

This undermines the credibility of their plan.

Regardless of which party wins, it seems Albertans are in for a sustained period of spending restraint. But only one party admits it.

Blaming Ottawa

No discussion of Alberta's fiscal situation these days is complete without covering equalization.

Op-eds and editorials regularly link the program to Alberta's deficit, as though the two are related (they aren't). And on the campaign trail, Jason Kenney continues to imply Alberta can stop paying into the program.

"No pipeline, no equalization," he says. (Spoiler: it's a federal program we have zero control over.)

The program is a regular whipping boy for Alberta politicians on all sides. Despite the intense zeal with which leaders whip up crowds, they appear to know little about how the program actually works. And even less about how to improve it.

The UCP platform offers a weak attempt to specify precisely what is "unfair" about equalization for Alberta. They make two proposals:

First, to "seek the exclusion of non-renewable resources revenues from the calculation." Rather than benefiting Alberta, this would, in most years, increase payments to Quebec. For 2018/19, this proposal would increase payments to Quebec by roughly $1 billion. I'm serious. It's a simple calculation. It's puzzling why the party keeps proposing a change that would amplify the very problem with equalization they regularly highlight — that Quebec receives so much.

Second, they propose to "seek a hard cap on equalization transfers."

Fair enough, there are good reasons for a cap. But the former federal Conservative Party government — of which Mr. Kenney was a cabinet minister, if memory serves — already introduced one in 2009.

Neither change will do anything for Alberta's finances or economy. And to propose something that already exists, to say nothing of proposing increased payments to Quebec, is sloppy to say the least.

A Fiscal Hail Mary

We need a better debate about Alberta's finances. Not all politicians are shying away.

Consider David Khan, leader of the Alberta Liberal Party.

Last week he came forward with a proposal to massively shift taxation away from income and towards consumption. Income taxes would be eliminated for a large number of Albertans, and corporate and personal income tax rates slashed. To pay for it, he proposed an eight per cent sales tax — comparable to Ontario today.

It's the most pro-growth idea of the campaign yet. One worth seriously considering by all parties.

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Whatever the route forward, Alberta faces difficult choices ahead.

Volatile resource revenues, an aging population, and rising debt levels will only increase the pressure. There are many options available, but none will be easy.

The sooner we start having this difficult conversation, grounded on concrete plans for the future, the better.

About the Author

Trevor Tombe is an associate professor of economics at the University of Calgary and research fellow at the School of Public Policy.

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