Let’s Talk Taxes: Alberta’s budget bubble

We’ve had it pretty good in this province. In fact, very good.
We have the lowest overall taxes in Canada, including no sales tax, and as of January 1st – no health care premiums. We also have among the highest, if not the absolute highest paid teachers, doctors, nurses and other government employees.

By Scott Hennig:

We’ve had it pretty good in this province. In fact, very good.

We have the lowest overall taxes in Canada, including no sales tax, and as of January 1st – no health care premiums. We also have among the highest, if not the absolute highest paid teachers, doctors, nurses and other government employees. We have the highest funded health care system (although wait lists are about average) and school system in the entire country on a per capita basis.

As for infrastructure, Alberta outspends every other province in Canada. Alberta will spend $8.8 billion this year on capital, compared to Ontario and their 13 million citizens who will spend $7.5 billion.

Of course this advantage is thanks in very large part to the revenues received from oil and gas.

If you had to put a figure on it, you could say that Alberta has a $215 billion advantage. Or put another way: other provinces would need to have a $215 billion Heritage Fund of their own, kicking out nearly $10 billion in interest payments each year to live like Albertans.

Unfortunately, what this also means is that Albertans also need a $215 billion Heritage Fund if we want to continue to spend like kings, while having the lowest taxes in Canada.

This $215 billion figure was recently revealed in a letter obtained by the National Post from the Alberta Financial Investment and Planning Advisory Commission (Mintz commission) to Alberta Finance Minister, Iris Evans.

The letter signed by all five members of the commission was sent to Minister Evans in June (five months after they wrote their final report), yet was never made public by the government.

It states: “the present value of the unfunded liability is estimated to be $215 billion dollars (as of the year 2008). This implies the government today would need to hold net assets equal to $215 billion if it were to maintain existing public services and the Alberta tax advantage into the future.”

In less technical jargon it basically says: we’re in deep trouble.

As of the end of September, the Alberta Heritage Savings Trust Fund had a balance of $15.8 billion. This means that we need to put roughly $200 billion into that fund today if we want to continue the low tax, high spending good times tomorrow.

Unlike the recommendations of the Mintz commission report that suggests Alberta needs a $100 billion Heritage Fund by 2030, the $215 billion number is not politicized or rounded-off to give Albertans an easy to remember target. $215 billion is the real number we need, and it will continue to grow each year because it is calculated in 2008 dollars.

Considering the Alberta government has had the Mintz report since January 2008 and this additional letter since June 2008, what have they been doing to address this very serious issue?

Next to nothing.

In fact, less than nothing. The recently released second quarter fiscal update not only cancelled all plans to put money into savings this year, but eliminated the pittance set aside to inflation proof the Heritage Fund. This means that even if investment markets had not tanked recently, the Heritage Fund would still be worth less next year than it was this year.

We are actually moving in the wrong direction.

The Alberta government has been floating our spending on a bubble fortified by oil and gas revenues. The thing about bubbles is that they eventually burst. And $40/barrel oil is the start of a big crack in this bubble.

Unless the Stelmach government begins to understand just how serious of an issue this is and takes action immediately to begin to put money into the Heritage Fund, Albertans should start bracing for severe cuts in government spending, massive tax increases or a return to huge annual deficits.

Goodbye bubble means goodbye Alberta advantage.