- Slight improvement in deficit forecast for 2020-21
- Recalibration of 3-year budget plan
- Balanced budget pushed further into future
- Fiscal anchors
- Ottawa’s growing indebtedness and other grievances
- Job Creation Tax Cut and cutting red tape expected to spur investment and employment
- Government stays with present course to resize spending
- Small hint about need to examine revenue structure
On Tuesday 24 November, Finance Minister Travis Toews released the 2020-21 Mid-year Fiscal Update and Economic Statement. (Watch the Press Conference here.) There was a slight improvement in the deficit numbers in the First Quarter Fiscal Forecast – then the deficit was estimated to be $24.8 billion- now the Government expects a $21.3 billion deficit. Improvements came mainly on the revenue side with $1.4 billion in additional federal support, a staggering $400 million rise in gambling revenue, $700 million in additional taxes, investment income, and $400 million in additional resource revenue
Finance Minister Travis Toews. “We live in a world of great uncertainty.”
Key positives in the Mid-Year Update were assistance from federal transfers due primarily to the: $1.3 billion Safe Restart Agreement; $263 million Safe Return to Class; $215 million in labour market, financial assistance and wage top-up programs; and $420 million this fiscal year of the $1 billion for orphan well site rehabilitation.
Recalibration
In a departure from previous fiscal updates, the Finance Minister has recalibrated the government’s previous 3-year forecast which, since February, had been seriously out of date. Compared with Budget 2020, revenue over the 2020-23 period is expected to be $30 billion lower, with over one-third being a drop in resource revenue. The Update includes revised energy and economic assumptions, benchmarking tables, and other tables, such as the historical fiscal summary out to 2022-23. This table shows that Alberta’s deficits will continue for the next several years amounting to about $25 billion over the 2021-23 fiscal period, up very significantly from the February budget.
The Finance Minister at the press conference was reticent to answer in any detail when and how his government would each a balanced budget. Notably he reiterated the high compensation in the public sector and that the Government would continue to follow the recommendations of the MacKinnon panel.
More than ever resource revenue is dominated by bitumen royalties. There has been some positive developments on natural gas prices over the past several months. However, the importance of continuing oilsands investments underline the growing political influence of three big domestic producers- CNRL, Suncor and Cenovus. These Calgary-based company’s prominence will grow as the Kenney government continues to place its economic recovery money on oil and gas investments, which chiefly means oilsands expansion. Oilsands expansion means high paying construction jobs which have been a focus of both the Notley and Kenney governments. Other chief revenue sources are not expected to soon return to pre-COVID levels. Revenue is expected to improve gradually as the pandemic’s economic effects dissipate. It is unclear how the Second Phase of the COVID-19 pandemic semi-lockdown will do to these projections. The Finance Minister spoke of $750 million more being budgeted on COVID-19 next fiscal year but was non-committal as to whether the new restrictions were incorporated into the fiscal and economic update.
Fiscal Anchors
A key message directed at the rating agencies was the description of fiscal anchors to guide future budgets. The new normal according to the Finance Minister is an economy which no longer is generating the high incomes Albertans have grown accustomed to. Once “high pay” to public sector workers was viewed as keeping up with the Joneses- now spending will be evaluated in relation to comparable jurisdictions. This fiscal anchor is right out of the MacKinnon playbook. A second anchor is net debt to GDP representing “the overall risk of the government” and the “government’s ability to repay current debt.” The final fiscal anchor is “some type of balanced budget rule” which reduces the “short-run temptation” for additional spending.
Grievances
In spite of federal assistance, the update again brings up Alberta’s dependence on the federal transfer system.
Alberta’s government will work diligently to right the fiscal ship, guided by these fiscal anchors and by Albertans’ hard work and aversion to the inequity of leaving our kids and grandkids to pay the bills for our programs and services. But we are not fully in control of our finances, as our fiscal condition is significantly affected by that of the federal government, and their policies. Federal government debt is projected at over $27,000 per person by year-end 2020-21.
Some Albertans feel that when times were good, we were treated as the cash cow, and now that we are in severe difficulty, we are perceived as an embarrassing neighbour. However one feels about whether Alberta is getting a fair deal, there is no disputing the fact that the federal government’s decisions, international relations, and financial reputation or credit rating affect Alberta’s ability to attract investment and jobs, our borrowing rates and our opportunities for future prosperity.
The message seems that Alberta does not value the support of the federal government because of the debt it unnecessarily imposes on the nation’s engine of growth (Alberta). Further, through possible federal debt mismanagement Alberta’s borrowing costs might rise. Not much of a thank-you for billions in federal assistance to the province, its municipalities, its workers, and businesses.
There is a great deal of rage, especially in rural Alberta, which is now directed at the federal government- to “Ottawa” and Justin Trudeau. Evidently there is a sign in Calgary urging drivers “to honk if you hate Trudeau.” Unemployment levels are high and rural communities, who have relied for decades on the capital spending of the oil industry to employ spouses, sons and daughters, is no longer much of an option.
To be sure, inequities in Employment Insurance is a legitimate grievance. Parliamentary representation is another legitimate beef. Equalization though is a different issue. It is part of the Canadian social fabric whether we like or not. In fact, it may be Alberta’s saving grace although we are probably to proud to accept.
How long can Mr. Kenney continue to attack Ottawa (while receiving significant fiscal help) and the engine of growth continues to sputter- is another matter entirely.
Private sector as wealth and job creator
In addition to criticism of federal fiscal policy- some of which may be valid – there was a sermon on “Alberta Fiscal Policy and Debt.” This homily recited the virtues of the private sector’s capacity to produce jobs and generate wealth.
While the public sector plays a key role in delivering public services, it does not create jobs or generate wealth. Rather, public sector activities and spending are paid by withdrawing money from the economy, through taxes, or by taking money from future taxpayers by borrowing for deficit financing.
Government’s role must be to strive to set the best possible conditions for private sector growth, including effective regulatory regimes and efficient government, right-touch financial supports reinforcing rather than subverting free enterprise, and a competitive tax regime.
Regulatory Reform and Taxation- who benefits?
These claims are buttressed by the results – real or imagined- of the Job Creation Tax Cut (JCTC)- endorsed by studies out of the University of Calgary’s School of Public Policy. However, while the JCTC is supposed to result in more revenue over the medium term, it is unclear whether tax shifting activity by large corporations will produce more personal income tax (jobs) as they shift their tax liability to the lowest tax jurisdiction e.g. Alberta. How the tax cut will affect the small business sector, which pays virtually no tax now, seems an aside.
On the merits of regulatory reform, which hits small business “particularly hard:”
the most significant impacts were realized by removing regulatory burden in Alberta’s largest industry sectors, freeing the businesses and Albertans who work and benefit from those sectors. By consulting with nine key industry panels, and reflecting on thousands of submissions from Albertans, government has cut red tape that job creators say will save industry over $476 million, which includes the elimination of 52,470 regulatory requirements.
Prime Minister Trudeau Source: Hilltimes
At this stage in the COVID world, it is uncertain who Alberta small businesses’ greatest ally practically is- the federal government – with its wage subsidy program and the well rehabilitation program – or the province preaching self-responsibility while keeping casinos open?
Will the Government remain locked into the belief that by reducing regulation for large resource companies, lowering taxes to large corporations, and attracting large investments, produce a multitude of high-paying jobs for increasingly desperate oil and construction workers?
Vulnerability to federal policies
Alberta’s vulnerability to higher interest rates and therefore higher debt servicing costs is also laid out.
A maturity of $5 billion with rates just 1 per cent higher adds $50 million to debt servicing cost expense – $50 million we have no choice to pay and $50 million less Alberta tax dollars available for seniors, children, low income or disabled Albertans, education or health care. A future fiscal anchor will have to include a structured debt repayment schedule.
The statement is basic math. It also goes to the helplessness of provincial finance ministers who must depend on the competence of Finance Canada and Bank of Canada officials to manage debt management and monetary policy. But here again, the reality is Canadian interest rate policy and to a lesser degree, fiscal policy, is under the purview of the United States’ political system.
On the economic front, the Finance Minister is hoping, or expecting, real GDP growth to slowly heal the province’s finances based on increased capital investment. The update notes the rather favourable residential real estate market – house building has not collapsed – courtesy of extremely accommodative interest rate conditions orchestrated by a creature of the Ottawa government – the Bank of Canada.
The strength of the residential- and to some extent- the commercial real estate sector- is very much an artifact of historically low interest rates. Who knows how steady the control of the U.S. Federal Reserve is? As the Mid -term statement notes, refinancing at rates that are one percentage points higher will mean more interest payments flowing to Toronto, New York, Zurich, and Tokyo. Toew’s economic assumptions count on he continuation of extremely accommodative monetary stance with 10-year interest rates staying well below one per cent and 3-month Canada treasury bills remaining at 20 basis points (0.20%). Increases will hit Alberta particularly hard should rates rise significantly over the next two or three years as the Update correctly observes.
We know that Albertans and Alberta businesses carry a debt load that is greater than the national average. Alberta is essentially in the same situation as during the Great Depression when eastern financial institutions held the mortgage on the family farm- the section that was so central to the success of the family farm.
Revenue Review?
Now that oil has been at relatively depressed prices for a long period of
time, in part because Alberta has lacked pipeline capacity and because of global economic conditions, questions about the Alberta government’s revenue mix have become more prominent. These questions will not distract the government from efforts to ensure limited tax dollars are being used efficiently, are directed at core programs and services, and are effective in accomplishing program objectives.
The government is signaling it will stick to its policies of grinding down public sector spending. This statement seems to suggest that some of the Finance ministry’s time is contemplating a long-overdue look at Alberta’s anomalous revenue structure.
Related Posts
https://abpolecon.ca/category/budget/