Alberta Budget 2014 - Who won, and who lost?

by Dr. Bob Ascah

Prelude

In October 2013, the President of the Treasury Board and Finance initiated an online poll asking Alberta citizens to provide input on provincial budget priorities. http://alberta.ca/albertacode/images/2014-budget-consultation.pdf   A disappointing 2,173 citizens responded. (Earlier consultations and surveys conducted under the Klein government received on similar topics received tens of thousands of responses.  For example, in the spring of 1996, the government received 61,000 responses in a survey entitled “Straight Talk, Clear Choices.” In the fall of 1998, “Talk it Up- Talk it Out”- garnered over 80,000. In 2000, the government survey entitled “It’s Your Money,” garnered 125,000 respondents.)

In this consultation the top priority for spending was “core services” including health, education, etc. at 52%.  Only 6.7% supported maintaining low taxes as a first priority and saving for the future was ranked a top priority by only 3.9%. The survey instrument also requested respondents to indicate their preferences for spending more, the same or less in 13 lines of business.  Consistent with the first question, education, advanced education and health were identified as areas for more spending achieving scores over 50%. Interestingly spending more on the environment was favoured by 47% while more spending on energy and resource development was favoured by only 14% of respondents.

Regarding the capital plan the survey showed that individuals were comfortable using “alternative” methods such as P-3 to fund infrastructure. Over 75% of respondents felt capital spending should remain the same or increase. Spending on schools and health care facilities were identified as top priorities for capital dollars. As far as the savings plan is concerned respondents were given a menu of 15 choices for the use of savings.  Choices ranged from a pension plan for Alberta, post-secondary education bursaries, economic diversification, support for business innovation or to support culture. The clear winners were operational spending and capital investment. For write-in comments  “a large majority were concerned about a reliance on non-renewable resource revenues, interest in a progressive personal tax rate and a sales tax, increases to corporate taxes, changes to royalty rates, and reinstating health care premiums.”

Political and Economic Context

The 2014 budget is the Redford Government’s second budget since the 2012 election. With the next election about two and a half years away, the Government faces the choice of continuing to restrain spending or to open the purse to address the reductions in funding contained in last year’s budget (e.g. post-secondary education).  The Government has slowed the pace of spending and promises to keep spending to below population growth and inflation. The Government has faced and is still facing labour relations challenges with AUPE and forthcoming talks with the United Nurses of Alberta. The Alberta government is committed to bringing in agreements similar to agreements reached with physicians and teachers.

On the economic front, things are looking up. Two factors in the province’s favour include current oil and gas prices which are slightly stronger than at the time of last year’s budget. Also helping the province’s revenues has been the decline in the value of the Canadian dollar.  Since energy exports are priced in U.S. dollars, a one-cent decline in the loonie means an extra $162 million (Budget 2013- in Budget 2014 the sensitivity was stated as $241 million) over the course of a full year for government coffers. Alberta continues to enjoy a very strong employment situation and with the labour force growing and wage increases this means stronger personal income tax revenue. Given stronger resource prices, this too should mean higher corporate tax revenue but this source of revenue is notoriously volatile. The recent fiscal update release on February 26^th showed a very positive momentum bridging into the new fiscal year with revenue above Budget 2013 projections of  $6  billion (including $2.6 billion for flood assistance).  While spending was higher due to the flood and increasing health care spending, an “operational surplus” of $1.4 billion is forecast.

2014 Budget

Winners Innovation was a big winner with a number of initiatives in train to strengthen Alberta’s energy dependent economy. A new endowment for agriculture and innovation is being seeded with $200 million from the Heritage Fund.  A Social Innovation endowment of $1 billion is aimed at “changing the long-term upward trajectory of cost pressures on the social service system by focussing on preventative and outcomes-based approaches and increasing the capacity of Alberta’s social and cultural sectors to innovate through experimentation with new delivery models and partnerships. In addition the Heritage Fund, over a 10- year period, will invest $2 billion in a Future Fund to provide strategic investments that “provide long-term benefits to Albertans and the Alberta economy.”  Ssuch a fund will encourage entrepreneurs of all sorts to approach the Alberta Investment Management Corporation (who manages the Heritage Fund) for funding.  This innovation seems to be is a return to the days of Peter Lougheed and Don Getty where subjective criteria (“benefits to the Alberta economy”) were used to justify investments in uneconomical projects.  (Reforms brought in the late 1990s were designed to require the Fund to maximize investment returns.)

Another winner is Justice and Solicitor General Ministry that receives funding for another 211 correctional officers and sheriffs.  In Environment and Sustainable Resource Development 206 new officers will be added to the Integrated Resource Management System. Recognizing the importance of qualified tradesman, the government will also be adding $200 million to the Alberta Heritage Scholarship Fund for trades-focused education. Finally the construction sector will be pleased with an overall increase of the capital plan where the three year spending profile is now $19.2 billion or $2.7 billion more than targeted in 2013.

Losers

The Health ministry will operate with $18.3 billion or a 3.6 % increase. An aging population and a system being led by two Acting co-CEOs and with strong political oversight do not augur well for a system that needs reform from top to bottom. K-12 Education receives a 3.2 % lift which will challenge school board trustees who have contracts with automatic salary grid increases.  For Advanced Education the support for universities and colleges increases by 1.5%. Although there are other categories in the Ministry that receive boosts such as the access to the future fund, the financial difficulties plaguing the post-secondary institutions will remain.

Final Comment

In the pre-budget consultations respondents urged the Government to consider new approaches on the revenue side (e.g. progressive taxation, retail sales tax).   According to Budget 2014, Alberta’s Tax Advantage is at least $11.6 billion. This means that even with small tax increases the province would be capable of saving significant portions of non-renewable revenue for future generations and increase funding for government services. With a revenue wind to the Government’s back, Budget 2014 is a reasonable budget spreading dollars to different interest groups.  The real challenge comes when oil prices fall and inter-provincial migration reverses.  Stay tuned!

Dr. Bob Ascah was born in Lachine, Quebec and received degrees in Commerce and Public Administration (M.A) from Carleton University. He completed his doctorate in political science at the University of Alberta in 1984. Before his appointment as Director of the Institute for Public Economics, he worked for the Alberta public service. After a short stint in Federal and Intergovernmental Affairs, he joined Alberta Treasury where he was responsible for financial sector policy, foreign borrowing, and liaison with ratings agencies. In 1996, he joined Alberta Treasury Branches (ATB Financial) as Secretary to the Board. Subsequently, Dr. Ascah was responsible for business planning, economics and government relations. In that capacity, Ascah was a frequent speaker on economics and financial institutions policy. He retired from ATB Financial in May 2009.  Bob Ascah is Chair, Canadian Cancer Society, Alberta/NWT Division and is the academic liaison for the Edmonton Regional Group of the Institute for Public Administration of Canada. In 1999, the University of Alberta Press published Ascah's Ph.D. dissertation Politics and Public Debt- The Dominion, the Banks and Alberta's Social Credit. Since joining the Institute, he has become a frequent media commentator on financial and economic issues.