Thomson: Prepare for Alberta’s ‘fudge it’ budget

 By Graham Thomson, Edmonton Journal March 2, 2013

EDMONTON – Premier Alison Redford will have reason to celebrate next Thursday when the government unveils the provincial budget.

March 7, after all, is her birthday. She’ll be 48.

Whether Albertans will be in a mood to celebrate is a whole different matter. To listen to the doom and gloom emanating from the legislature the past few weeks, this will be the toughest budget in years. There’ll be cuts to some government services and many who rely on government paycheques are facing a wage freeze or worse.

Given that Redford had made an election commitment to balance the books in 2013-14, you can call this the “broken-promise budget.”

Things are so dire that the government delayed the opening of the spring sitting, scrapped the speech from the throne and had the premier deliver a televised fireside chat on Jan. 24 to warn us of bad news to come.

“The Alberta government will collect about six billion dollars less in revenue this year alone,” said Redford in her state-of-the-province address, which was akin to the U.S. president telling the world we’re about to be hit by an asteroid — only instead of wiping out all life on earth, our fiscal Armageddon would obliterate every school building and teacher in Alberta, theoretically. “To put that in context, that’s equivalent to all of our government’s spending on education each year,” is how Redford put it.

Of course, Redford wasn’t talking about shutting down our education system. She wanted Albertans to understand what it means to lose $6 billion worth of budget revenues. She even helpfully gave a name to the fiscal fireball on a collision course with her budget: the “bitumen bubble.”

The government is receiving much less money from energy royalties because oil companies are receiving much less money for the bitumen produced from the oilsands. The government initially thought it would collect a total of $13.4 billion in revenues from non-renewable resources in the 2013-14 fiscal year. Now, it’s looking at getting maybe $7.4 billion.

So, how will the government deal with that $6-billion hole?

It has three options: paper over the hole by borrowing money; fill in the hole by raising taxes; or shrink the hole through cuts to spending.

Redford has already been talking about borrowing money for capital projects but she cannot borrow her way out of a $6-billion hole without plunging a proudly debt-free province back into debt.

She has rejected tax hikes out of hand, which severely restricts her ability to increase government revenues.

That leaves cuts. But Redford has said they won’t be massive. More of a scalpel approach than a chainsaw. Redford will keep spending on the priority areas of health and basic education, although an anticipated 4.5 per cent hike for health, for example, will be scaled back to around two or three per cent.

But keep in mind that even if health and K-12 education received no funding increase this year, those departments will still account for $23-billion worth of government spending (in 2012-13, education and health accounted for 55 per cent of the $41-billion budget).

Redford is expected to give more money to municipalities — and she’s been telling reporters she is focused on supporting non-oil sector industries such as agriculture, health research and green technologies.

Rather than deep, across-the-board cuts, Redford will try to hold the line on spending. As she said vaguely on Jan. 24, “some programs and services will change, especially those that are not sustainable over the long term.” It’s widely expected, for example, the government will chop the $7-million Summer Temporary Employment Program that provides summer jobs for about 3,000 students every year.

There’ll be wage freezes for teachers and less money for doctors — and labour unrest for months to come as nurses and civil servants get into contract talks — and the government has already announced a three-year wage freeze for civil service managers that’ll save about $50 million.

The cuts and freezes, though, are largely symbolic.

Without massive borrowing, or tax hikes or significant cuts to government spending, the numbers don’t add up to $6 billion.

That’s why opposition politicians are convinced the government will take option four: fudge the budget figures.

First of all, the government will use up all the money in the province’s savings plan. Just four years ago the Sustainability Fund contained $17 billion. Today, the province’s economic cushion has maybe $3 billion left. At this rate, that cushion will be of the whoopee variety in a matter of months.

But even using up the $3 billion in the fund will still leave the budget billions of dollars short.

So, let the fudging begin.

One scenario has the government dividing the budget into two parts: operating and capital. It borrows billions of dollars for capital projects which frees up money to pay for the day-to-day operating of the province, thus allowing the government to say it has “balanced” the operating budget. At the same time, the government amortizes the payments for capital projects over decades, which means it can downplay the cost of the projects in any one year. Sort of like saying the $100,000 mortgage on your house is really only $10,000 because that’s how much you’ll pay toward the mortgage this year.

To make things even more complicated, the government will introduce a third facet into the budget: savings.

“As we make the tough, but thoughtful decisions to live within our means,” Redford said in her Armageddon speech Jan. 24, “we have a plan to once again begin investing a portion of our resource revenue in the Heritage Fund — the first time that will have happened in over 25 years.”

It’s an oxymoron — to be talking about saving money when you don’t have any money to save. However, announcing a new savings plan is the government’s way to help fend off criticisms that it has just wiped out our old savings plan.

And then there’s a final ace up Redford’s sleeve: the economy.

Despite the fiscal problems facing a government overly dependent on volatile oil revenue, the province’s economy is growing at twice the national average. Employment is up, so are housing starts. As a news release from the Canadian Federation of Independent Business announced on Thursday, Alberta’s entrepreneurs “remain the most confident in Canada about their economy and their future success.”

Redford might be about to unveil a broken-promise budget but Albertans are a forgiving lot if they have jobs to go to and new trucks to get them there — and if they don’t see any major disruption in government services they’ve come to expect, such as decent health care and new schools.

By holding the line on spending in some areas, spending selectively more in other areas, using up the last of our savings, and fudging the figures, Redford’s budget on Thursday might not look as bad as she’s led us to expect. It’s the old political bait and switch — warn people they’re about to be hit by a 10-per-cent tax hike and they’ll be happily relieved when it’s “only” five per cent.

Not that there’s any talk of tax hikes in this budget.

That might come next year, though. If the “bitumen bubble” continues to play havoc with government revenues and if the government is not prepared to drastically cut spending, it will have few options but to raise taxes.

If that happens and the government is forced to introduce a tax-reform budget in 2014, I’m willing to make one fearless prediction: they won’t introduce it on the premier’s birthday.

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