Digging Alberta out of the deficit hole

Alberta Premier Jim Prentice has warned Albertans that the current fiscal year’s projected surplus has turned into at least a $500 million deficit and that next year’s budget will sink deeper into red-ink territory.

To dig Alberta out of a cavernous deficit requires a clear understanding of short-term and long-term budget problems and how governments are able to control spending, or not.

Those who focus solely on revenues consistently ignore that there are two sides to a ledger. But oil could double in price tomorrow and provide extra revenues in the short-term. That wouldn’t solve the deeper problem: spending, that is often locked-in long-term and thus needs long-term remedies.

So let’s do some long-term thinking on the spending side.

Government spending is made up of programs (including staff costs to support health care, education and social services) and capital expenditures (highways, hospitals and schools to name a few).

Reining in capital expenses is relatively easy in the short-term. A government can postpone or cancel a highway or school, or if it proceeds, demand a better deal from potential suppliers of the project.

Why can they do this? Because these projects are almost always built by private sector contractors. Getting the best price, or the desired combination of price and quality, is driven by private-sector suppliers who compete with each other to win the bid.

Now turn to program spending. In Alberta, health care, basic and advanced education, and social services accounted for $31 billion—or 70 per cent—of the $44 billion spent on programs last year. Most of these services are delivered by people employed either directly by government or by arms-length agencies in the broader public sector funded by the province.

And that matters to balanced budgets (and frankly, even to providing more services at a sensible cost). For example, Premier Prentice recently estimated that 77 per cent of education expenditures go to compensation for teachers and others employed in that field.

That’s why the province has a much tougher time reforming program spending. Such employees often have a near-monopoly grip on the delivery of services courtesy of their government union.

For example, most nurses in government-owned, government-run hospitals are represented by a government union—the Alberta Nurses’ Union. The Alberta Teachers’ Association represents, of course, teachers. And the Alberta Union of Provincial Employees represents government employees.

Unlike private sector unions that compete to provide a desired good or service, government unions face no such competition. Government employees’ unions instead rely on taxpayers as if citizens were an endless cornucopia of cash. That lack of competition means program expenditures are difficult to change because the province faces stiff organized opposition to any attempt to moderate compensation.

For example, Alberta’s government unions—all of them—fought mild government employee pension reforms introduced by former finance minister Doug Horner (and spiked by Premier Prentice). The AUPE and CUPE even opposed a proposal by the province to reduce pension payouts for those who take early retirement—as early as age 55 in some cases. Instead, the government employee unions demanded that early retirement with full benefits continue forever.

If the province wants to better control spending, especially its two biggest line items, health care and education, useful reforms would moderate costs (and if done sensibly, reward public-sector staff for improving the system).

Such reforms happen all the time in the private sector. For instance, energy companies are now negotiating with suppliers to get a better deal; they also solicit front-line staff on how to trim unnecessary costs.

Their message? It’s better to stay employed and help a company survive, than refuse all options for moderating costs.

In contrast, government employees’ unions have shown no willingness to offer up wage concessions or to reform their gold-standard pension plans. That’s not a recipe for delivering government services at a price that clients—in this case, Albertans—can afford.