No PST—Alberta government has a spending problem, not a revenue problem

A projected $18.2 billion. That’s the huge number the Kenney government forecasts for Alberta’s budget deficit this coming year. In other words, $4,096 per Albertan.

In response, there’ve been calls for a provincial sales tax to help balance the budget, most notably from the Business Council of Alberta. While replacing other taxes (i.e. those on personal income) with a sales tax might make good policy sense, new taxes to balance the budget fail to address the root cause of Alberta’s fiscal challenges—unsustainable spending. As management icon Peter Drucker once famously noted, “the right solution to the wrong problem is more dangerous than the… wrong solution to the right problem.”

While COVID and the ensuing economic and social restrictions have taken a toll on Alberta’s finances, its fiscal problems predate the current crisis. First, consider that the provincial government ran deficits in 12 of the past 13 years. And pre-COVID deficits totalled more than $50 billion. Add to that the deficit this year ($20.2 billion) and the $18.2 billion forecasted for this coming year and total budget deficits over 14 years total $90 billion or more than $20,000 per Albertan.

The provincial government ran deficits regardless of the party in power. PC, NDP or UCP. And regardless of whether oil averaged more than $90 per barrel, as it did for many years, or under $40 per barrel. And when provincial revenues increased from $39 billion in 2008/09 to $50 billion in 2018/19.

A lack of revenue, low oil prices, the ruling political party—these are not the reasons for Alberta’s fiscal woes. What was the core problem? Prolific undisciplined government spending.

To truly understand the depth of Alberta’s spending problem, it’s important to understand recent history. Twenty years ago, the “Alberta Advantage” was strong. The province had come back from the fiscal brink, and through the Klein reforms, had eliminated its debt and become the most attractive province for investment thanks in part to a smaller government sector, less regulation and competitive taxes. In 2001/02, per-person government spending in Alberta ($6,573) was lower than other provinces including neighbouring British Columbia ($6,821).

Fast-forward nearly 20 years and Alberta’s pre-COVID per-person spending ($12,636) was 20 per cent higher than in B.C ($10,560). Yet critically, there’s no evidence Albertans enjoy better public services.

Indeed, in 15 of the past 20 years (again, pre-COVID), the Alberta government increased spending significantly more than was necessary to account for price changes (i.e. inflation) and population growth, with much of the increased spending going to government-sector compensation.

Had the provincial government stayed disciplined, and increased spending at a prudent rate—that is, accounting for inflation and population growth (i.e. 4.2 per cent per year on average)—total government program spending would have been $14 billion lower pre-COVID that it actually was ($42.1 billion compared to the actual $56.1 billion price tag in 2019/20). Moreover, because total provincial government revenue was $46.2 billion in 2019/20, Alberta could have ran a budget surplus in the year preceding COVID. Not only that, it would have been in surplus every year for the past 20 years.

To repeat, the problem isn’t oil prices, a lack of revenue or the political party in office. The problem is undisciplined spending. Suggesting Alberta implement new taxes to help tackle the deficit shows a lack of understanding of the actual problem and recent Alberta history.

All the evidence suggests if Alberta increases taxes or adds new ones, the government won’t actually use the new tax revenue to balance the budget, it will simply increase spending. Consider that over the past five years, the province has seen a significant increase in personal income tax rates, business income tax rates and a carbon tax. And the government still ran deficits.

There will be an appropriate time to debate the design of Alberta’s tax system and whether or not the province should consider a sales tax to reduce or eliminate other, more economically damaging taxes. But let’s not conflate this policy issue with the real reason for Alberta’s fiscal crisis and the real fiscal issue the Kenney government must tackle.