Prentice chooses Getty over Klein; further erodes Alberta Advantage

With tumbling oil prices and resource revenues, Premier Jim Prentice had a choice when he delivered Alberta’s 2015 budget. He could emulate former premier Don Getty and raise taxes or follow the Ralph Klein playbook and reduce spending.

Prentice chose Getty, and in the process, will markedly erode what’s left of the Alberta Advantage.

In the lead up to the budget, Prentice talked the talk, even announcing last month that the budget will include an across-the-board five per cent spending cut. Many commentators were quick to draw parallels with former premier Klein, although Klein more aggressively cut spending and faced a more precarious fiscal situation.

Those comparisons were obviously pre-emptive—and wrong. The budget will actually shave just one per cent of program spending in 2015/16, hold the line for the next two years, and then increase it by 2.8 per cent in 2018/19 and 2.3 per cent in 2019/20. All told, program spending will increase 4.3 per cent by 2019/20 relative to the current fiscal year (2014/15).

Compare that to Klein’s 1993 budget which included a plan to significantly reduce program spending, decrease government employment, and balance the budget in four years. Klein ultimately surpassed his original goals and balanced the budget in just two years, with program spending declining by 21.6 per cent over the next three years.

Importantly, Klein combined spending cuts with program reform, enabling the government to spend less while maintaining, and in some cases improving, the quality of services.

So much for the Klein comparison. But it gets worse.

Channelling Getty, Prentice announced multiple tax hikes, everything from higher personal income taxes (amounting to an additional $820 million by 2018/19), a new health care tax ($557 million), higher fuel ($562 million) and tobacco ($91 million) taxes, to an insurance premium tax ($177 million). When fully implemented, the announced tax measures will total roughly $2.7 billion or about five per cent of total revenues.

Here, the divergence with Klein could not be more apparent. While the Alberta Advantage is partly premised on lower taxes generally compared to other provinces, it’s particularly rooted in its single rate personal income tax of 10 per cent, a Klein-era legacy.

Prentice proposes to undo this Alberta hallmark. Starting next year, Alberta will move to a three-rate system with income up to $100,000 taxed at the current 10 per cent rate, income between $100,000 and $250,000 at 10.5 per cent, and income over $250,000 at 11 per cent. The two higher rates will increase to 11.5 per cent and 12 per cent, respectively, in 2018, with the top rate falling to 11.5 per cent in 2019.

Crucially, these tax hikes set a bad precedent for other provinces. Historically, Alberta has been looked upon positively as a model for tax reform. By moving away from the simple, pro-growth single tax rate, other provinces may now find it easier to raise taxes and make rates more progressive. Remember, provinces compete with each other. And tax policy plays a key role in any jurisdiction’s ability to attract and retain talented workers and investment, and to foster economic growth.

An important fruit of Klein’s early reforms and overall legacy was his ability to pay off provincial debt and make Alberta debt-free since 2000/01. His reforms also allowed the province to start setting money aside in a rainy day fund.

Prentice’s budget expects deficits of $5 billion and $3 billion in the next two years. By 2016/17, the contingency fund’s balance will fall to $1 billion (from $6.5 billion in the current fiscal year) and Alberta will, for the first time in 17 years, be in a net debt position—when the government’s liabilities exceed financial assets.

Government budgets are ultimately about choices. Unfortunately, in following Getty’s lead, rather than Klein’s example, Prentice chose a path that further erodes the Alberta Advantage and takes the province down a path of increased spending, higher taxes and more government debt.