Province needs to address both sides of its income statement
By: Ken Allred
| Posted: Wednesday, Oct 31, 2012 06:00 am
Here we go again – another review of the province’s financial criteria. Kyle Fawcett, Alberta’s associate minister of finance, has been charged with reviewing Alberta’s financial situation and proposing a strategy for going forward. Fawcett’s job is not new – a special commission was appointed in 2002 to make recommendations on the state of the Alberta economy and in fact every elected MLA is by implication charged with that mandate.
But let’s look at the facts. The Heritage Savings Trust Fund was created in 1976 and soon rose to approximately $12 billion by allotting 30 per cent of resource revenues into the fund. The Heritage fund was created with four objectives:
• First, and most importantly, it was created as an endowment fund for future generations. Fifty per cent of the fund was to be held for the day when revenues from non-renewable resources dry up.
• Economic diversification: 20 per cent was to be set aside to seek ways to diversify our economy now, before oil and gas revenues stall.
• Quality of life improvements: 20 per cent was earmarked for long-term investments for the future, such as medical research and scholarships.
• Lastly, it was to be a rainy day fund. Only 10 per cent was to be put away to help us in times of short-term recession.
A lot has happened in the past 36 years. Unfortunately we have moved away from investing resource revenues in the Heritage fund and its growth barely keeps up with inflation due to transfers to general revenue. In fact we are living off our non-renewable resource revenues to pay for day-to-day operational expenditures.
We do have a sustainability fund, which now acts as a rainy day fund, but it has been drawn down considerably in the last few years and unless the economy turns around and we reduce our spending habits it will disappear in the next year or so. And now we are talking about borrowing for infrastructure projects.
We do need to review the mandate of the Heritage fund. The basic premise was sound – we need to save for the future and plan for when non-renewable resource revenues decline – which they will. Otherwise future generations will face huge tax increases and a major reduction in government services.
Economic diversification is still important – it goes along with the need to offset non-renewable resource revenues. We have invested wisely in some state-of-the-art medical research facilities that we can all be proud of and our scholarship programs are generous. As I said, we do have a rainy day fund but that was only 10 per cent of the initial Heritage fund mandate so we need to get creative and look at other options.
Some say we don’t have a revenue problem – we have a spending problem. Kevin Taft, former Alberta Liberal leader says in his recent book that we have a revenue problem – not a spending problem. Personally, I believe the answer is a little of each. We do have a spending problem – Alberta spends more per capita than any other province in Canada. We also have the lowest taxes of any province.
Former premier Stelmach probably had it right when he revised our royalty rates but time was not in his favour as we entered the 2008 recession just as those new rates took hold and he was forced to roll them back. Fortunately with the shift to non-conventional oil and the rapid expansion of the oilsands we are maintaining a reasonable revenue stream but conventional oil and gas revenues are in decline. The strength of the Canadian dollar is also working against us.
Personally I, like most Albertans, detest the concept of a sales tax, even though most economists tell us that it is the most efficient form of taxation. Perhaps we need to look at a modest increase in the rate of our unique Alberta flat tax. Some would like to see it abolished in favour of a more progressive tax regime but together with the higher basic exemption limit, the concept of a flat tax is probably sound.
I don’t envy Mr. Fawcett his task but I hope he will come up with a good balance because it is imperative that we get our spending under control and reinvest in our future.
Ken has always been concerned about our fiscal strategies, both as a private citizen and while serving as MLA for St. Albert.