Government revenues are on a downturn despite positive economic growth
The press release and narrative accompanying the Alberta Government’s first quarter fiscal update, released earlier this month, read like a dream.
The Alberta economy is now expected to grow by 3.1 percent this year, up from the 2.6 percent the government had forecast in the budget. Alberta will lead the provinces in economic growth in 2017. Alberta has added some 17,000 jobs so far this year and job growth is also expected to surpass projections in the budget.
The average number of rigs drilling thus far in 2017 is almost double what it was at this time last year, housing starts are up 23 percent from the same period in 2016, and non-energy exports were up 7.1 percent in the first half of 2017.
Finance Minister Joe Ceci has been wearing a big smile of late, and boasting up and down the country about the current state and the future prospects for the Alberta economy, and he has every right to. The positive economic indicators and job growth are a testament to the NDP government’s decision to avoid brutal and arbitrary spending cuts and focus instead on protecting public service funding and job creation through infrastructure spending and economic diversification.
It is safe to say that Alberta’s economy and jobs would not have gotten back on a growth cycle again this quickly had the government followed the advice of Jason Kenney and Brian Jean and thrown tens of thousands more Albertans out of work through public service and infrastructure spending cuts. Holding the line on spending while making strategic investments is working for the province. One only need look at Saskatchewan to get a full sense of how spending cuts only serve to slow economic recovery. Kenney and Jean can scream for cuts and layoffs all they want, but the proof is in the numbers, and everyone from the Conference Board of Canada to a recent report from TD Bank seems to agree.
There is also, however, one piece of important bad news in the quarterly update that, for obvious reasons, Ceci does not seem terribly interested in talking about.
Despite all the very positive economic indicators, government revenues are down from budget pretty much across the board. The government has had to make downward adjustments on the projected revenue lines for income tax, corporate tax, and non-renewable resource revenues. What that means, in the simplest of terms, is that even though the economy is now fully in recovery mode, government revenues are not.
In fact, the numbers are so bad on this front that just three months into the fiscal year the government has already had to allocate half of its $500 million risk adjustment budget (essentially a contingency fund) to try to keep the deficit from surpassing what was projected in the budget. The government has also doubled, from $200 million to $400 million, the amount of savings it expects to find over the course of this fiscal year. There is no clear indication of where exactly these savings will come from, just a promise that they will be found and realized between now and March 31, 2018.
What makes these numbers on the revenue side truly concerning is the context. Albertans have been under-taxed for decades, choosing to rely instead on revenues from oil and gas to pay the bills. In the 2017-2018 budget, for example, total revenue from individual and corporate income tax accounts for less than one-third of the provincial government’s operating expenses for the year, never mind the costs associated with disaster assistance and recovery, capital expenditures, and debt servicing. Tax revenue in the budget doesn’t even cover the full cost of our healthcare system. Even when you add the value of all the other taxes we pay, from education and fuel tax to the various sin taxes, revenue from taxes still doesn’t even cover half of the province’s operating expenses.
With oil prices expected to remain low, and recover slowly, if at all, over the course of the next decade, the lack of adequate tax revenues will pose a bigger and bigger problem with every passing year. The folly of relying on oil and gas revenues to fund core public services has become crystal clear over the last three years. The government has said repeatedly that it would be irresponsible to raise taxes, or introduce a sales tax, in the midst of an economic downturn. Maybe they were right. But we are now very clearly coming out of the economic downturn, and we have reached the point where it would be irresponsible to continue behaving as if we do not have a revenue problem.
The government has done a fantastic job of getting the province’s economy going in the right direction. Now it’s time for them to get their own fiscal house in order. If they do not, the long-term viability and sustainability of all our public services and infrastructure is at stake.