Advice for Alberta ahead of budget day

If Alberta's premier and finance minister are looking for some last minute advice, several economists have pointers to help the province use this week's budget to overcome a looming $7-billion revenue shortfall because of plunging oil prices.

The guidance from just about every economist is something the government won't act upon. The fact is, it's hard to find an economist who does not think introducing a provincial sales tax (PST) is necessary for Alberta to stabilize its finances and wean itself off oil and gas royalties.

"It's really simple, this is the right time to do it," says Jack Mintz, chair of the University of Calgary's school of public policy, who proposes a one per cent PST. "The Alberta government would get another billion dollars in revenue, of which, 10 per cent would be paid by people who visit the province or work temporarily in the province that otherwise wouldn't pay taxes in the province."

Mintz says a sales tax makes much more sense than raising corporate taxes because that would be self-defeating in a struggling economy.

"I think it is such a sensible tax to consider if you are going to be looking at a new source of revenue that is also pretty reliable and not sensitive to the economy," says Mintz.

Alberta's finance minister Robin Campbell will deliver the budget on Thursday. Not just any budget, but what's described as a game-changing budget and 10-year financial plan. Premier Jim Prentice even promised the budget will fundamentally restructure how the province spends and saves money to insulate it from future swings in oil prices.

Months ago, Prentice and Campbell said all options were on the table to increase revenue. But eventually, they began ruling out increases to corporate taxes or oil royalties. Still under consideration are hikes to income taxes, re-introducing health care premiums and user fees to cover the revenue shortfall.

"We know there has been huge volatility in the Alberta budget over the years and what we want to see is a plan," says Janice Plumstead, economist with the Canada West Foundation, a Calgary-based think-tank. "Obviously a PST is pretty easy to administer and implement, but if there was going to be a sales tax, the best model is a harmonized sales tax, to harmonize it with the GST."

Just last week, TD Bank warned the government of Alberta could be facing a long-term deficit situation for reasons beyond the temporary plunge in oil prices. TD called it a mistake for the government to rule out a PST.

Besides the revenue challenges, economists also suggest Alberta will have to cut expenses. Public sector unions are angry and worried over the way unions have been targeted by the premier. Many capital projects such as new roads, bridges and hospitals are under review and could be delayed or cut back in size.

"We did let spending ramp up too much over the past 15 years in Alberta, on a per capita basis, particularly before 2010, and we have made a big mistake in that regard," says Mintz.

No matter the changes proposed in the upcoming budget, the price of oil will still weigh heavily on how much money the government will have to spend or save. That's why many economists will watch what oil price forecast the government will use in its budget. Predicting the price of crude is fraught with risk, but essential.

The Alberta government was basing its 2014-15 budget on an average WTI oil price of $95 US. During the second quarter, the forecast was lowered to $79 US. The government once again revised that figure for the last fiscal quarter to $44.

The forecast for 2015-16 may be a little higher, but likely not by much. The most recent forecast by Martin King, FirstEnergy Capital commodity analyst, for WTI is an average of about $50 - $55 US in 2015.