Albertans were not amused when then premier Jim Prentice famously suggested they “look in the mirror” for the source of the province’s budget woes.
“All of us have had the best of everything and haven’t had to pay for what it costs,” the late Mr. Prentice bluntly warned just days before losing the 2015 provincial election to Rachel Notley and the NDP.
New Premier Jason Kenney looked in the mirror last week and decided what Alberta really needs is a big corporate tax cut. His United Conservative Party government plans to slash the rate to 8 per cent from 12 per cent over four years as a way to spur business investment.
“We need to take the defibrillator to the Alberta economy,” Mr. Kenney said as he unveiled his government’s first major economic initiative.
It is unclear if the tax break will get businesses spending again – in the slumping oil sector or anywhere else.
What is certain is that, absent other fiscal moves, the tax cuts will open a large hole in government coffers. The province stands to lose $1-billion a year in revenue, even after estimated gains from businesses investing and hiring more, according to UCP estimates.
The warning from Mr. Prentice, who died in a 2016 plane crash, is as compelling today as it was in 2015. The province is on an unsustainable fiscal path, relying too much on depressed oil and gas royalties. Instead of saving the windfall royalties in the good times, successive Alberta governments spent them.
The sensible thing for Mr. Kenney to do would be to introduce a sales tax, and harmonize it with the federal GST. Alberta stands alone in not having a provincial sales tax. Ontario, for example, generates nearly $26-billion a year, or roughly 17 per cent of total revenues, from its 8-per-cent tax.
A sales tax would help Alberta offset the cost of the corporate tax cuts and give it a stable source of revenue that wouldn’t fluctuate with the price of crude. It would help pay for all those things Albertans want, including good schools, quality health care and modern infrastructure.
But if he’s like his predecessors, he won’t go there. Public opinion in Alberta remains dead-set against a sales tax.
The alternatives could prove far less appealing. Mr. Kenney has promised a seemingly impossible combination of no tax hikes, no reduction in public services, a freeze on spending and a balanced budget by 2022-23. He has not said how he intends to do all that while also contending with inflation and an increasing population.
Many other provinces have budget deficits. But Alberta is at risk of making its own shortfalls chronic.
The promised corporate tax cuts will make Mr. Kenney’s job even more difficult.
The Premier recently named Janice MacKinnon, a former Saskatchewan finance minister, to chair a six-person panel to make recommendations by late August on how to better manage government spending. Tax changes aren’t in her mandate.
Alberta lost its fiscal way decades ago. From the mid-seventies to the mid-eighties, the province regularly transferred resource royalty revenue into the Alberta Heritage Savings Trust Fund. The idea was to sock away money for future generations and reduce the economy’s dependence on oil – as Norway has done so successfully with its North Sea bounty.
Instead, the province spent its resource windfall, in good times and in bad. It didn’t save when it was running surpluses. And it’s not saving now that it has a large budget deficit.
Starved of new resource revenues, the size of the heritage fund has plateaued. At the end of 2018, it had $17.6-billion in assets, not much more than it did a decade ago. That’s less than what the province spends each year on health care.
It could be a while before Alberta gets another chance to save for rainy days. The province is producing nearly as much oil as it ever has – even after recent production cuts mandated by the government. But royalty revenue has slumped to less than $3-billion a year from a peak of $14.3-billion in 2005-06. The province did not regain that summit even in 2008 when oil prices reached a record high.
Stalled pipelines and mounting climate change pressures do not suggest another oil boom is imminent.
Four years from now, Mr. Kenney may look in the mirror and wish he had seized this opportunity to phase in a sales tax as he cut corporate taxes.