New taxes, spending restraint needed to avoid fiscal cliff in Alberta, report warns

This story was originally published on Nov. 20.

Alberta could face a deficit of almost $40 billion in 2040 unless the government restrains spending and tempers oil and gas royalty swings with new taxes, according to a report from the University of Calgary's School of Public Policy.

Economist Trevor Tombe, the author of the new report, says finding a solution to the province's economic woes will require avoiding extremes and doing away with short-term political thinking.

"A combination of restrained spending growth and modest new revenues — rather than focusing solely on either tax increases or harsh spending cuts — will create a sustainable economic future for Alberta," he writes.

Despite the common rhetoric, he says the province has neither a spending problem nor a revenue problem. It has a budget problem.

"The conclusion here is simple: substantial spending restraint alone is insufficient to close Alberta's fiscal gap," writes Tombe.

"Entertaining new revenue sources or using carbon tax revenue to address long-run debt sustainability are an important part of the policy mix we should consider. Cancelling the carbon tax and forgoing these revenues, without a clear plan to raise other revenues or achieve spending reductions to compensate, is to exacerbate Alberta's already unsustainable fiscal situation"

Rising debt without changes

His analysis looks at resource royalties, federal transfer payments, investment income, property taxes, tuition revenue, health and education spending and debt service costs to project the $40-billion figure.

That represents four per cent of Alberta's economy.

"A deficit of this magnitude, combined with capital investments that also add to debt, could raise the ratio of net debt to GDP to almost 50 per cent by 2040 — higher than any point in Alberta's history," reads the report, called Alberta's Long-term Fiscal Future.​

Tombe points out that budget deficits haven't been this high in the province since the 1980s and told reporters that his projection points to Alberta having higher debt to GDP by the 2030s than it did during the Great Depression.

"While these short-term challenges are well known, the longer-term ones are more significant," he writes.

"Even if plans to balance early in the next decade succeed — a goal shared by government and opposition parties alike — an aging population, rising debt levels and volatile resource revenues, to name a few factors, will create increasing fiscal pressures."

Based on his projections, Tombe says the net debt to GDP ratio could grow to nearly 50 per cent by 2040, with interest costs ballooning to more than $22 billion.

"I estimate increasing revenue or decreasing spending by 2.7 per cent of GDP is required for long-run sustainable finances," he writes. "This is equivalent to a 10 per cent sales tax or to cutting $1 in every $6 spent by government."

But his paper suggests the blend of spending restraint and taxes that would eliminate those extremes.

Premier Rachel Notley said making those kinds of cuts would be impractical.

"If we were to cut public services by 17 per cent, which is proposed by the U of C public policy group, and, sometimes, depending on the day of the week, by the official opposition, that we would see massive, massive damage to our economy that we would hurt people and hurt communities, and that is not a thing that our government is gonna do."

Alberta still leads country

As bad as things appear, Alberta still has the lowest net debt to GDP ratio in the county, at 8.7 per cent. The next closest province is Saskatchewan at 15.4 per cent. Newfoundland and Labrador sits at the top of the pile with 47.3 per cent.

"We should take comfort in the fact that today, Alberta's government balance sheet is strong, we do have the lowest net debt and it's projected to remain so for the next few years," he said to reporters while presenting the paper. "What that means is we need to take drastic, immediate steps today, or face a crisis."

He points to Newfoundland as an example of a place struggling to fight the drop in oil prices without a lot of room to manoeuvre.

The one thing that sets Alberta apart and endangers its fiscal future is what Tombe calls an addiction to resource revenues.

"Resource revenues are also volatile, so relying on them is difficult," he writes.

"Since 1980, the variance of Alberta's resource revenue growth from one year to the next was 15 per cent per year while, for comparison, the variance of personal income tax revenue is less than 2.5 per cent."

Tombe argues it makes sense to invest royalties into savings like the Heritage Fund rather than relying on them as general revenue and replacing that revenue with taxes.

He says the challenge of closing Alberta's fiscal gap is big but not insurmountable so long as meaningful policy choices are made immediately. Delay just makes the gap that much harder to close.