New sales tax wrong way to fight Alberta’s deficit

Printer-friendly version
Appeared in the Edmonton Journal, February 8, 2016

A group of Alberta-based academics recently published an op-ed claiming that “Alberta must bring in a harmonized sales tax” to eliminate the province’s budget deficit.

The authors are correct that Alberta’s deficit is a serious problem. However, they have identified the wrong solution.

The last thing businesses and consumers need is yet another new tax piled on top. Instead, to eliminate the deficit the government should strike at its root cause, which is the failure of successive governments to restrain spending.

Between 2004/05 and 2014/15 program spending in Alberta increased by nearly 100 per cent, roughly twice the combined rate of inflation plus population growth and greater than the rate of economic growth. A recent Fraser Institute study showed that if the province had restrained program spending growth to the rate of economic growth since 2004/05, Alberta would now be in surplus rather than deficit.

In this light, tackling the deficit by reforming and reducing provincial spending is a more reasonable response than simply more revenue through tax increases.

The authors of the op-ed suggest that the provincial government won’t find its way out of its current fiscal mess through spending reductions alone. But this neglects the history of successful fiscal consolidations in Canada, which have focused largely on reducing spending. Consider Alberta’s own fiscal consolidation of the 1990s, when the province cut spending significantly under Premier Ralph Klein and eliminated large deficits.

Alternatively, consider the successful deficit elimination program of Jean Chretien’s Liberal government in Ottawa, which included only minor tax increases representing a small portion of the overall reform package. Economists have estimated that the ratio of spending cuts to tax increases was approximately 5:1 during that period. Chretien’s strategy focused primarily on reforming and reducing spending.

These specific examples from Canada’s history are in line with international research suggesting reducing spending is generally a better strategy for eliminating deficits than raising taxes. Not only are spending-focused consolidations more likely to achieve the objective of eliminating deficits, they also do less economic damage. A recent study by Harvard economist Alberto Alesina and Boccocini University professor Francesco Giavazzi examined deficit elimination approaches in 14 countries (including Canada) over the period 1981 to 2007. The authors concluded that “while tax-based adjustments are associated with deep and long lasting recessions, expenditure-based adjustments are not.” This runs contrary to the notion that spending restraint creates negative economic outcomes.
With that said, introducing a harmonized sales tax in Alberta isn’t necessarily a bad idea—it’s just not the right way to eliminate the deficit. The only way a new sales tax would make sense for Alberta would be if the revenue is used to reduce other, more economically harmful taxes such as the corporate and personal income taxes, with the result being no additional revenue for the government.

This type of revenue-neutral sales tax harmonized with the federal GST could improve tax efficiency and help spur economic growth—but it wouldn’t help reduce the deficit in the short term.

A new HST should not be implemented if it is yet another revenue grab. Albertan taxpayers have already been hit hard in recent months with increases to personal and corporate taxes as well as the announcement of a new carbon tax. Creating a new sales tax as part of a strategy to eliminate the deficit through ever-higher taxes would be misguided.

When it comes to eliminating the deficit, discussing new potential sources of revenue is precisely the wrong focus. Alberta’s fiscal challenges have emerged because of rapid spending growth over the last 10 years, and the appropriate solution is to strike at the root of this problem by working to reduce and reform provincial spending.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.