Alberta’s coming budget on Oct. 24 could be a turning point for the province. Albertans face a choice between righting Alberta’s fiscal trajectory by confronting overspending – or postponing difficult choices with a harder reckoning down the road.
Many economic headwinds – for example, roadblocks to petroleum exports – are not Alberta’s fault. However, undisciplined spending growth hid behind flush resource revenues during past decades, and the province failed to save. Deficits since 2015 have plunged the provincial balance sheet into net debt. And, like all provinces, Alberta faces an aging population on the horizon. Without making bold moves toward a significant course correction, any balanced budget will be temporary.
So, how can Alberta’s spending be reined in over the coming years?
Alberta’s present circumstances are addressed in the “Shadow Budget” published by the C.D. Howe Institute this past week, which builds on former Saskatchewan finance minister Janice MacKinnon’s recently released report on provincial spending.
The Shadow Budget confirms that an effective four-year freeze on program spending growth is appropriate. A freeze will reduce Alberta’s inflation-adjusted per-capita provincial spending to the nationwide average. While Alberta’s per-capita government spending exceeds that of any other province – notably on health and education – its major cities’ living costs sit at the nationwide average. Further, neither Alberta’s health or education indicators show better outcomes or service levels than in lower-spending provinces, suggesting less bang for one’s buck.
Over the course of this downturn, Alberta’s private sector has rigorously rationalized costs. Similar scrutiny – and accordingly tough decisions – must be applied to public-sector spending. While a freeze might be achieved in other ways, those options would involve trade-offs – either deeper cuts elsewhere or higher taxes.
One place that is ripe for revamping is health spending. While on-the-ground transformation is needed to find efficiencies, Alberta must also bring nurses’ wages and physicians’ fee-for-service rates into line with their counterparts in other provinces.
These hard-working professionals should not be scapegoated, as they have been elsewhere. But Alberta cannot sustain rates for physicians that exceed nationwide benchmarks by more than 10 per cent. Alongside bringing fee-for-service rates in line with other provinces, the fee schedule should be rationalized to recognize productivity gains in certain specialties. Alberta should also experiment with a “dual practice” model, where physicians can bill up to 10 per cent of their time in private services. This would encourage doctors to work more hours and reveal competitive market rates for compensation.
In the education sector, Alberta should reduce non-instruction spending, moderate teacher salaries and increase average class sizes. This would bring Alberta’s spending into line with other provinces, such as B.C., whose students have outperformed Albertans on internationally administered standardized tests.
The province should reduce provincial funding for each student and move to performance-based allocations. The purpose of public investments in postsecondary education must be to enhance students’ human capital. Tying institutions’ funding to graduates’ labour market outcomes gives universities and colleges a stake in their students’ investment.
As well, tuition in Alberta is below the nationwide average. Universities and colleges should have flexibility to set tuition locally. To ensure access, the province should move to an income-contingent student loan program, where repayment terms vary with postgraduate earnings.
Nonetheless, even with rigorous spending restraint, rebalancing revenues will take two more bold steps, as short-term savings alone won’t prevent a downward spiral of deficits.
First, resource revenues paid to the province should be saved in the Alberta Heritage Savings Trust Fund. This is because royalties from companies extracting our resources represent a one-time conversion of Alberta’s natural capital. Future generations of Albertans should also get to share in it.
Second, following the projected return to balance in 2022-23, Alberta should implement a consumption tax. This consumption tax should be accompanied by a tax credit for low-income individuals and a 2 per cent cut to the marginal rate for the lowest personal income tax bracket. This would reduce the average tax rate for middle-income workers to a competitive level with other provinces.
A 3 per cent consumption tax, harmonized with the federal Goods and Services Tax, would replace forgone revenues from reductions in corporate and personal income taxes. Revenues from a consumption tax would allow Alberta to run continuing surpluses and save revenues from resource royalties. This saving would in turn grow the investment returns from the Heritage Fund. In this way, the establishment of a consumption tax would position Alberta to save for a sustainable fiscal future.
On Oct. 24, Alberta will have a once-in-a-generation opportunity to get back in the saddle. It won’t be easy, but the alternative is falling off the horse.
Grant Bishop is the associate director of research at the C.D. Howe Institute.
