Spending cuts—not tax hikes—to balance Alberta’s budget

As the Kenney government’s first budget approaches, some pundits and analysts are calling for higher taxes to help shrink the Alberta’s deficit. These calls are ill-advised. Instead of hiking taxes, the government should stick to its guns and tackle the deficit by reforming and reducing provincial spending.

Following the release of the MacKinnon report on Alberta’s public finances, which called for a path to balance over four years based entirely on spending restraint, calls for new or higher taxes became louder and more frequent. Journalists, pundits and some academics asked the question—why focus entirely on spending restraint instead of raising taxes to balance the budget? And more specifically, why not implement a sales tax, which exists in every other province except Alberta?

To be sure, there’s a reasonable argument for an HST in Alberta. It is, after all, a relatively less-economically harmful tax than most others. But this policy change should not be used to shrink the deficit. Indeed, any new sales tax should be “revenue-neutral,” matched with dollar-for-dollar cuts in either the corporate income tax or personal income tax to help the economy grow.

But even introducing an HST to help shrink the deficit, without such corresponding tax cuts, would unnecessarily impede Alberta’s economic recovery. In reality, trying to reduce the deficit through higher taxes would be an economically-harmful strategy. There are better ways to reduce the deficit with an eye on economic growth and job creation.

In other words, if the purpose of a new HST is to replace more harmful taxes and make the tax system more efficient, that’s fine. If it’s intended as a partial solution to the deficit, it should be a non-starter.

The economic case for slaying deficits by reducing spending—instead of generating more tax revenue—is sound (as Harvard economist Alberto Alesina’s work shows). Higher taxes create a headwind that would interfere with the province’s economic recovery, which would make getting out of the fiscal hole even harder. Spending reductions, on the other hand, can help fill the gap without similar negative economic consequences.

Back to the original question posed by some pundits. Given the size of Alberta’s deficit, is it practical to focus on just one side of the ledger instead of both? Can Alberta really slay the deficit without raising taxes?

The answer is, emphatically, yes. As the MacKinnon Report shows, Alberta spent $2,451 per person more on government program spending than the average spent by the three largest provinces in Canada. Reducing spending to that average rate would save the province $10.4 billion per year—enough to easily erase the deficit. The MacKinnon report further shows that a nominal spending freeze over four years will be enough to eliminate the deficit. And our own analysis shows that if the government went further and reduced spending by approximately three per cent annually over the next three years, it could balance the budget ahead of schedule while also creating room for economy-boosting tax cuts including reductions to personal income tax rates, a crucial area where Alberta has become less competitive in recent years compared to several U.S. energy-producing states.

Of course, spending reductions aren’t as simple as waving a magic wand. But previous governments in Canada, of all political stripes—Romanow’s NDP in Saskatchewan, Chretien’s Liberals in Ottawa and Klein’s Tories here at home—all made much deeper cuts in much shorter time periods, successfully solving even worse fiscal challenges than Alberta faces today.

Alberta’s fiscal problems today are serious but not impossible to solve, and they can—and should—be addressed without tax hikes.