Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada
It is not sportsmanlike to kick someone when they're down, and Alberta is definitely down right now. Now that the province's Royalty Review Report has made common-sense recommendations, this may also be an opportune time to have a grownup conversation about Alberta's long-term fiscal and economic strategy. A centrepiece of the conversation ought to be what makes Alberta competitive and prosperous, and specifically the so-called "Alberta advantage."
One popular interpretation of the "Alberta advantage" is a highly competitive tax environment – no provincial sales tax and low personal and corporate income-tax rates. In theory, a favourable tax environment attracts investment and people to the province and spurs on robust economic growth and wealth creation.
This narrow interpretation of the Alberta advantage, however, has real limits. Alberta has been able to keep its business and personal taxes artificially low for the past three decades, thanks to a wonderful natural endowment of energy resources and by incorporating royalties from the sales of energy directly into the provincial budget. While the design of the royalty regime has attracted considerable attention, how the royalties are actually used is also important.
A large portion of Alberta's royalties have been treated as a more-or-less permanent revenue source to be spent on current government services. So the true underlying "Alberta advantage" in this scenario is not the tax rate, but the province's energy-resource endowment and related royalties that successive governments have treated like "found money."
This policy choice has no doubt been popular with past and current voters, but it creates three core problems. First, using royalties from the sale of non-renewable energy resources to finance current government services is, in essence, spending the inheritance of future generations. That's short-sighted at the least and could even be regarded as "selfish."
Second, funnelling royalties into the provincial budget has arguably been one more factor driving up compensation and other costs across the Alberta labour force and economy, with spillover effects into the private sector.
Third, using energy royalties in the budget has amplified the commodity-driven business cycle in the province. When energy prices are high, rising royalties help to encourage public-sector spending, adding to short-term economic growth. If the royalties were banked, not spent, that would help to dampen the upside and downside energy cycles for the provincial economy.
Of course, when resource prices collapse, as they have over the past 18 months, the rapid shrinkage of royalties (and corporate and personal income-tax revenue) puts immediate pressure on the fiscal balance. It's hard to quickly adjust public spending and salaries downward as revenues collapse. The combination of forces increases the size of the fiscal deficit, likely beyond what would normally be expected.
In a period of collapsed energy prices, related royalties and business profits, Alberta governments are faced with unattractive choices. They can: minimize the deficit by cutting public spending on core services, such as health care and education; and/or raise taxes, which then slows economic activity further and prolongs the recessionary forces; or maintain spending and accept a larger-than-expected fiscal deficit. New stimulus spending on infrastructure can help to speed the recovery, but comes at an added fiscal cost.
In our view, a more sustainable and responsible approach would be to deposit energy royalties in the vaunted Heritage Fund and use only the investment earnings in current government budgets – just as Norway does. This approach would build the province's resource wealth for many generations to come, dampen the swings in the business cycle, and reduce cost pressures for employers, thereby improving Alberta's competitiveness. Of course, higher taxes on current economic activity, including higher personal income tax and even a sales tax, would likely be required to pay for current services – a tough but necessary decision.
We believe there just might be another, better source of the "Alberta advantage" – the innovative spirit and can-do attitude of its people. Innovation and risk taking are the real drivers of long-term business and economic success.
In a recent Conference Board of Canada report card on innovation in Canada and its provinces, Alberta received an A-plus grade in terms of entrepreneurial spirit and the willingness of its citizens to create their own businesses.
Furthermore, Albertans' entrepreneurial ambition was first overall among 26 jurisdictions assessed, which include the 10 provinces and 16 advanced developed countries. Many prominent firms in the energy patch, but also outside it, have been formed by Albertans with the drive to seize an opportunity and create something of their own.
The bottom line? If there is an "Alberta advantage," it is the innovative and entrepreneurial spirit and attitude of the people who live there – not spending their kids' inheritance to reduce current tax rates. Is Alberta ready for a discussion about its true advantage?
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.