OTTAWA — The Globe and Mail
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Jim Prentice, the man who briefly ran Alberta, was punished at the polls for saying Albertans should “look in the mirror” for the source of the province’s budget problems.
But he was not wrong.
For years, the Progressive Conservatives gave Albertans exactly what they wanted – low taxes, generous government spending and a hands-off approach to the oil patch. And for that, voters rewarded the party with a string of majorities stretching back decades.
Until last Tuesday, that is, when Mr. Prentice was tossed out of office for speaking an inconvenient truth.
For too long, the province – its government and its people – have relied on a risky strategy of using fickle royalties from depleting oil and gas reserves to fund government operations.
With royalty revenues ravaged by the oil price collapse, Mr. Prentice was trying to prepare Albertans for the prospect of paying more to keep what they have.
“In terms of who is responsible, we all need to look in the mirror. … Basically, all of us have had the best of everything and haven’t had to pay for what it costs,” Mr. Prentice said in early March on a CBC radio program.
It was a good line to prepare Albertans for an austere budget. But it proved to be a regrettable campaign slogan.
Mr. Prentice’s analysis was also flawed, in part because he misdiagnosed the problem. He said repeatedly that Alberta had the highest-cost and best public services in the country.
Research suggests that’s only partly true.
Alberta’s health-care system is indeed the most expensive in the country, but it’s only middle of the pack in terms of what it delivers for the cost, according to the Fraser Institute’s 2013 Health Care Index.
Likewise, Alberta is among the top performers in Canada in the Conference Board of Canada’s education and skills report card, with a B grade. But British Columbia and Ontario earn equally good grades, with significantly lower overall per capita government spending.
So it’s understandable that Albertans would react angrily to Mr. Prentice’s budget, which slashed health-care spending, cut 1,700 health-care jobs and introduced a new health-care tax.
It isn’t necessarily that Albertans don’t want to pay higher taxes; they just don’t want to get less health care for their money.
And that’s a useful lesson for Rachel Notley’s incoming New Democratic Party government, which faces the same awkward budget conundrum as Mr. Prentice.
Resource royalties, which account for one-fifth of government revenues, have left a huge hole in the government’s finances.
The NDP has promised to raise the province’s business tax rate, now among the lowest in the country, to 12 per cent from 10 per cent.
That would be politically appealing, but counterproductive in the current economic environment. Business taxes are typically passed along to consumers anyway, so it’s not a particularly efficient way of generating additional revenue. And it makes those businesses unable to pass along the tax less competitive.
A better solution would be to introduce a provincial sales tax – set low initially, but eventually ratcheted up as oil prices and the economy recovers. Ottawa’s two percentage-point cut in the Goods and Services Tax (GST) has left Alberta considerable fiscal room, if the NDP has the political guts to use it.
The economic literature is overwhelming on the relative merits of various taxes – consumption taxes versus personal or corporate income tax. Consumption taxes are a clear winner for governments, producing a steady and reliable revenue stream, while causing the least economic dislocation.
Next, Ms. Notley must commit to rebuilding the depleted Alberta Heritage Savings Trust Fund. Like Norway, which has socked away $850-billion (U.S.) in its sovereign wealth fund, Alberta must commit to saving for future generations the rents it exacts from the oil and gas sector.
A ban on drawing down the fund to pay for general services would be a good start.
The bulk of future royalty revenues should be put into the fund, and left there.
And any money taken out of the fund should be focused on investments in the future, such as research and development and skills training.
Down the road, royalty increases and higher gas taxes should also be put on the table. But now probably isn’t the time to raise royalties, when various oil sands projects are being cancelled or delayed.
It’s Ms. Notley’s turn for a little self-reflection.
