Ensuring the Alberta advantage

Alberta’s decades long economic success is a result of resource wealth, relatively sound public policies and a growing skilled labour force. Compared to other energy-producing jurisdictions such as Alaska, North Dakota, Saskatchewan, Texas, and Wyoming, Alberta does well economically but there are areas of concern, which if ignored, may affect the province’s long-term prosperity.

Among comparative jurisdictions over a 10-year period, Alberta enjoyed the second highest average rate of real economic growth and the second highest level of real per capita GDP. But its growth in real per capita GDP ranked second last. Increasingly, Alberta suffers from weak productivity, with low growth in real output per worker.

Alberta’s strong performance is increasingly due to extensive rather than intensive economic growth – that is, from growth of inputs rather than improvements in productivity. Over the period 2001 to 2012, Alberta ranked last with respect to its average growth rate in real output per worker GDP across these 10 jurisdictions.

Alberta’s fiscal performance is weaker than other energy-producing jurisdictions despite a strong economy. Several U.S. states are enjoying consecutive large surpluses while Alberta only just reported an operating surplus and continues to accumulate long-term debt associated with capital spending. Also, Alberta’s net debt position has quietly eroded from a net asset position of $31.5 billion in 2007-08 to a net asset position of $12.1 billion in 2012-13. As Mark Milke has noted, had the government of Alberta simply maintained the real value of per person spending in the province since 2005, Alberta would have recorded balanced budgets.

Alberta’s challenges are amplified by a disproportionate reliance on volatile natural resource revenues compared to comparable jurisdictions. Without resource revenues, Alberta moves from the fourth highest average surplus (per capita) over the 2000 to 2011 period ($763), to the second largest average per capita deficit ($1,626).

The province has also done a relatively poor job stewarding its natural resource bounty in the form of a sovereign wealth fund. Among the seven North American jurisdictions that have such a fund, Alberta’s Heritage fund is ranked third behind Alaska and New Mexico and fourth in terms of the per capita value of the fund. As well, Alberta’s per capita value of the fund was one-twentieth the value of Alaska’s, one third the value of Wyoming’s, and less than half the value of New Mexico’s.  Alberta’s fund has also grown the slowest of the funds in existence between 2000-01 and 2012-13.

Finally, Alberta can improve its tax mix by shifting away from income taxes and towards a consumption tax. Three of the jurisdictions included in our analysis have no income taxes (Alaska, Texas, and Wyoming). Moreover, Wyoming and Texas also impose no corporate income tax. In addition, Alberta’s tax rates vis-à-vis the U.S. states with personal and/or corporate income taxes tend to be higher. By reforming the tax system to rely more on consumption taxation, Alberta would bring its mix of taxes in line with competing energy producing provinces and states and improve the efficiency of its tax system.

Despite its impressive economic performance, Alberta cannot rest on its laurels and must ensure its future competitive edge by boosting economic productivity, restoring long-term fiscal balance, reducing reliance on volatile resource rents, building up the value of its Heritage Fund, and reforming its tax system by bringing in a provincial consumption tax. Not doing so will in the long run relegate the Alberta advantage to merely a footnote in Canadian economic history.