Beginning of the end of Alberta Advantage
The 2007 Alberta budget signals the beginning of the end of the Alberta Advantage -- an advantage based largely on the combination of Canadas smallest government and the countrys lowest tax rates.
A significant part of the explanation for the current boom enjoyed by Albertans are the policies embedded in the Alberta Advantage and implemented by former Premier Ralph Klein.
Unfortunately, the profligate spending, dearth of tax relief and complete lack of economic vision in last months provincial budget signals a shift away from the very policies that created the foundation of todays prosperity.
The spending increases announced in Budget 2007 were staggering. Operating expenditures are set to increase by 10 per cent and total expenditures (operating spending, capital grants, emergencies and natural gas rebates) by almost 12 per cent this year (2007-08).
In comparison, Albertas economy is expected to grow by 6.2 per cent. In other words, government spending is increasing at almost twice the rate of the economic growth. While the planned growth in spending for 2008-09 and 2009-10 is significantly lower than 2007-08, past experience shows that governments are rarely constrained by their original plans.
Whats more, the increased spending comes at a time when Albertans already enjoy the highest level of per capita program spending in the country. According to Statistics Canada data, per capita program spending in Alberta was an astounding $11,215 last year compared to an average of $9,707 among the remaining nine provinces.
In addition, the level of per capita program spending in Alberta (adjusted for the effects of inflation) has increased 45 per cent in the past 10 years, from $7,720 in 1996-97 to $11,215 in 2005-06. With spending set to increase faster than inflation and population growth, per capita spending will further increase this year.
Provincial differences in operating spending pale in comparison to capital spending. According to the government, Albertas capital spending of roughly $1,930 per citizen is almost four times the average of other provinces ($525 per person).
In addition, governments three-year plan to spend over $18 billion on capital projects, is an astounding 37 per cent ($4.9 billion) increase from the 2006-09 plan initiated just last year.
Equally as disappointing as the large increase in spending, is the complete lack of program reform. Put differently, there was no discussion of financing and delivering health, education, and capital goods in a different way in order to control costs while providing better services.
Regrettably, increased spending and lack of program reform come at the expense of tax relief. Indeed, the most important pillar of the Alberta Advantage has been low personal and business tax rates.
Past reductions in business and personal taxes have strengthened the incentives to work, invest, and undertake entrepreneurial activities in Alberta. In addition, Albertas taxes have until recently been significantly lower than most other provinces.
Over the past five years however, neighbouring British Columbia has been aggressively catching up. In 2001, British Columbias top personal income tax rate (19.7 per cent) was nearly double that of Albertas (10 per cent).
While Alberta has not reduced its personal income tax rate since 2001, British Columbia has reduced theirs by 25 per cent. Just this past February, British Columbia again reduced personal income tax rates (another 10 per cent for British Columbians earning up to $100,000) and now has the lowest personal income tax for individuals earning up to $108,000 of any Canadian province, including Alberta.
B.C. has similarly closed the business tax gap by reducing corporate income taxes and eliminating the general corporate capital tax.
Saskatchewans NDP government has also followed suit by implementing an aggressive business tax relief plan aimed at being more competitive with Alberta.
With a booming economy and revenues flowing into government coffers, the government should have seized the opportunity to strengthen Albertas diminishing tax advantage.
To that end, a fiscally prudent way forward would have been to save surpluses in the Heritage Fund rather than go on a spending spree. The earnings garnered from an increase in the Heritage Fund endowment could have then been used to permanently reduce personal and business tax rates.
By returning to the profligate spending of the past, the Alberta government has clearly lost its way. A concerted effort to constrain spending, reform program delivery, and reduce taxes is required to secure the Alberta Advantage.
For the future prosperity of all Albertans, lets hope the government rethinks its current spend-it-if-you-got-it budget plan.
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