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Decision Time: The Alberta Shadow Budget 2019

Grant Bishop
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Grant Bishop: C.D. Howe Institute

C.D. Howe Institute Commentary, 2019, issue 554

Abstract: In its upcoming budget, Alberta’s government has a once-in-a-generation opportunity to correct the province’s fiscal course. This Shadow Budget demonstrates how Alberta could return to budget balance by 2022-23 and plot a sustainable path for balanced budgets over the long-term horizon. The Shadow Budget illustrates that, by careful spending restraint and restructuring of its revenues, Alberta could move to saving resource revenues and increasing investment income for future generations. This vision contrasts with a status quo where budgetary headwinds from an aging population would drag Alberta back into mounting deficits – along with a downward spiral of debt service costs – in the coming decades. But long-term fiscal sustainability will require near-term measures to restore Alberta’s budget balance and then sustain surpluses. Building on the recent MacKinnon Report, this Shadow Budget shows that a four-year freeze is advisable to bring Alberta’s program spending in line with per capita levels in other provinces. This report goes further to outline a set of reductions in inflation-adjusted per capita spending across program areas to achieve this top-line spending freeze. This Shadow Budget recommends specific reductions in inflation-adjusted spending in health and education through a revamp in funding for hospitals, wages for nurses, fee-for-service rates for physicians, administration costs in education, salaries for teachers, increased class sizes, and per student funding for universities and colleges. Significant restraint for inflation-adjusted spending will also be required for social services and spending by government departments – particularly through grants and external procurement. While a freeze might be achieved in other ways, this Shadow Budget provides specific targets for spending restraint based on nationwide benchmarking, observing that Alberta out-spends counterpart provinces without demonstrably better service levels or outcomes. In order to moderate new debt for capital outlays, this Shadow Budget also proposes a substantial down-sizing of Alberta’s capital plan, highlighting Alberta’s comparatively high per capita stock of public infrastructure assets and capital grants to municipalities. Nonetheless, even with rigorous spending restraint, this report also shows that rebalancing revenues will be critical for Alberta to reduce distortionary corporate and personal income taxes while sustaining surpluses over the long term. Even after return to balance, ongoing surpluses are necessary in order to save resource revenues. Drawing on widely accepted economic principles, this Shadow Budget argues that resource revenues should be saved. This is because these represent a one-time conversion of Alberta’s natural capital in which future generations of Albertans should also share through sustainable returns on investments from Alberta’s Heritage Fund. Therefore, following the projected return to balance in 2022-23, this Shadow Budget proposes to reduce the marginal rate for the lowest personal income tax bracket and implement a consumption tax (recognizing this requires an affirmative result in a province-wide referendum). This Shadow Budget shows how this reduction of personal income tax rates would enhance Alberta’s attractiveness to middle-income workers. The establishment of a 3 percent consumption tax (harmonized with the federal Goods and Services Tax) would replace reduced revenues from more distortionary corporate and personal income taxes while allowing Alberta to save for a sustainable fiscal future.

Keywords: Fiscal and Tax Policy; Provincial Taxation and Budgets (search for similar items in EconPapers)
JEL-codes: H61 H68 (search for similar items in EconPapers)
Date: 2019
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