Back to Deuce - Losing the Alberta Advantage

Much has been made of the Alberta Advantage, the simple yet wonderfully effective combination of reduced government spending, lower taxes, streamlined regulation, and debt reduction, which propelled the Albertan economy forward beginning in the mid-1990s and lasting up until today. Unfortunately for Albertans, and other Canadians that see Alberta as an economic beacon, the province is the midst of losing that advantage and returning to the dark days of unsustainable spending increases, tax increases and deficits. Alberta urgently needs to return to the set of policies (less government spending, lower taxes, rational regulation, and debt relief) that ushered in the current period of prosperity to ensure that it continues.

It’s important to first recognize that spending drives taxes, not the other way around. What government spends on programs ultimately has to be paid for by taxes and other revenues. All too often politicians, bureaucrats, and citizens in general discuss spending as if it is a function of the amount of revenue raised, rather than the determinant of what has to be collected.

The principal fiscal problem facing Alberta is the spending spree it has been on for the better part of the last three years. According to Statistics Canada’s Financial Management System (FMS), total government spending in Alberta, adjusted for inflation, has increased 26.3 percent since 1997/98, representing an annual average real increase of 6.0 percent. This includes total inflation-adjusted increases in education and health of 32.0 percent and 43.1 percent, respectively. So much for the stingy Alberta Government’s lack of investment in education and healthcare that we all hear so much about.

It is not entirely surprising that total expenditures increased when one considers that the province’s population increased 8.0 percent between 1997 and 2001, increasing from 2.8 million to nearly 3.1 million. Per capita spending by the government, that is, the amount of money the government spends per person has also been increasing at a rather alarming rate. Total real per capita government spending has increased 17.0 percent since 1997/98, representing an annual average real increase of 4.0 percent. This includes real per capita increases in education and healthcare spending of 22.2 percent and 32.5 percent, respectively.

In fact, on a per capita basis, Alberta spends more money on education than any other province and ranks fifth in per capita healthcare spending, seemingly buying into the fallacious argument that spending more means better results. Alberta’s poor performance in controlling spending is further evidenced by their dismal performance in the Spending category of the Fraser Institute’s bi-annual Budget Performance Index. Alberta received the second lowest score (23.7 out of a possible 100) of any Canadian jurisdiction.

Not surprisingly given the size of recent spending increases, Alberta has had to delay planned tax cuts and actually increase excise (sin) taxes. The official rationale for the change in tax policy was that revenues were growing slower than expected. Since 1997/98 when the spending spree began, total inflation-adjusted government revenues have increased 10.0 percent. This includes a 9.5 percent increase in total inflation-adjusted personal income tax receipts. Again, some of the increase would be expected given a growing population, however, even per capita revenues have been increasing. For instance, total inflation-adjusted per capita revenues for the province of Alberta have increased 1.9 percent since 1997/98 even though the province has implemented rather large tax reductions.

The problem for Alberta, which has been experiencing a growing economy, is that the government’s revenues have not been growing as fast as their spending. Admittedly, part of the explanation is that Alberta has reduced its tax rates for individuals and businesses. However, the mix of tax relief coupled with earlier spending reductions is exactly why the province’s economy has been prospering. Moving away from this model, as the province is currently doing, will not benefit Albertans, even those who are receiving some of the province’s new found largesse, as this renewed sense of government efficacy has led and will continue to lead to larger government and the need for even more taxes.

The key for Alberta’s future success is to return to the core principles of the Alberta Advantage: less government spending, lower taxes, reasonable regulations, and decreasing debt. It seems simple but as the last few years have shown, it can be difficult to follow.