Path to balance or road to perdition?

“The path to balance”—how they would go about eliminating the provincial deficit if they were to form government—is a key plank in the platforms of the major parties in the 2019 Alberta election.

Both the UCP and the NDP, in particular, lay out specific year-by-year plans in their respective platforms for how they would move Alberta from our current-year projected deficit of $6.9 billion back to a surplus position by the next provincial election.

The UCP plan would see the provincial books back in the black in the 2022/23 fiscal year, with a surplus of $714 million in that year. The NDP platform, on the other hand, reiterates the path to balance presented in the third quarter fiscal update, which proposes balancing the books a year later than the UCP, with a projected surplus of $900 million in the 2023/24 fiscal year. (Both the Alberta Party and the Liberal Party have also promised to balance the books over a similar time frame, but at the time of this writing neither had presented a detailed platform outlining their proposed fiscal approach.)

Despite presenting similar timelines for reaching balance, the specifics of how each party proposes to get there actually present very different sets of values and priorities. This blog highlights some of the key differences and potential impacts of the path-to-balance proposals, and also attempts to provide an overall assessment of how credible the plans and projections actually are.

Revenue projections

The first divergence between the UCP and NDP plans is their projections for revenue going forward.

The NDP projects that provincial revenues will grow from the $51.6 billion projected in the third quarter update for this year to $63.5 billion in 2022/23 and $67.4 billion the following year. The NDP proposes no changes to individual, corporate, or carbon taxes in its platform. As such, it relies on three key areas for the projected increase in revenues:

• more workers earning more money and paying more income tax;
• more corporations and small businesses earning greater profits and paying more in taxes; and
• greater market access and higher oil prices resulting in higher royalty revenues.

Although the first two assumptions rely to some degree on population increases, an increase in investment, and some success in the NDP’s economic diversification efforts, the core premise behind all three of these projected increases, in typical Alberta fashion, is oil and gas revenues. The calculation is that first the crude-by-rail strategy and eventually new pipelines will result in higher prices and more product getting to market, which in turn will result in greater employment and higher royalty revenues. Specifically, the NDP forecast assumes a total increase in natural resource revenues of some $7 billion between now and 2023/24. To put that number into perspective, total resource revenues for 2018/19 are projected to come it at just $5.5 billion, so the forecast is that those revenues will more than double over the next five years.

Unlike the NDP, the UCP promises significant declines to provincial revenues over the next four years. Most significantly, the UCP pledge to scrap the Carbon Levy will remove approximately $5.7 billion from provincial revenues over the next four years, and its commitment to reduce corporate taxes by 4% will remove an additional $3.4 billion. Proposed UCP changes to the carbon regime for large emitters and its proposed withdrawal from the Federal Low Carbon Economy fund will remove an additional $1.5 billion from revenues. In total, the UCP plan sets out to reduce provincial revenues by over $10 billion in the next four years, although the party's platform documents say $1 billion of that lost revenue would be replaced in the last two years of their mandate as a result of the claimed trickle-down effects of the corporate tax cut.

Beyond actively removing revenue from the provincial budget, the UCP plan also predicts lower base revenues over the next four years than does the NDP plan. According to the UCP platform document, endorsed by a private economic modeling firm, the NDP’s total revenue projections are too optimistic by a total of $8.6 billion over the next four years. As such, the UCP projects downward revenues in its platform by that amount. Just as in the NDP platform, however, the UCP revenue projections are largely premised on new pipeline capacity coming on-line in the next three years and significantly higher prices for Alberta’s resources.

Spending projections

The key difference between the UCP and NDP paths to balance lie in what they propose to do with spending over the next four years. It is worth noting that Alberta’s third quarter fiscal update forecasts total operating expense for the 2018/19 fiscal year, including crude-by-rail and Climate Leadership Plan expenses, to come in at $48.9 billion.

Consistent with its campaign promise not to increase spending during its term, the UCP platform takes that $48.9 billion figure and uses it as the baseline for spending over the next four years. The only adjustment the UCP makes to that spending number over the next four years is to add the cost of its election promises, some $663 million over four years, and a small annual risk adjustment ($500 million to $700 million per year) to serve as a contingency in case of declining oil prices. In other words, the UCP’s four-year financial plan makes absolutely no provisions for adjusting expenses to cover either population growth or inflation. Most forecasters agree on an average combined population and inflation growth projection for Alberta of between 3.5% and 3.6% for at least the next five years. Given those projections, the proposed UCP spending freeze would amount to a virtual cut in operating spending of around 14% over the first term of a potential Jason Kenney government. Kenney has vowed to ease the impacts of that cut by finding “administrative efficiencies” across government and moving the savings to the “front lines,” but it is highly unlikely that the efficiencies found will compensate for that cut.

For its part, the NDP platform does modestly increase operating spending every year, but it too does not keep pace with population growth and inflation. With projected inflation and population growth over the five years coming in at a cumulative total of 18%, the NDP’s plan will only see operating spending increase by 15% over the same period, amounting to a virtual cut of 3% over five years. Like the UCP, the NDP commits to funding that 3% shortfall by finding administrative efficiencies across government. The NDP’s overall election promises add up to $3.5 billion over five years, but those numbers had already been factored into the path to balance presented with the third quarter fiscal update so there will be no net change in those spending projections.

Debt

Given that both the NDP and UCP project operating deficits for at least three of the next four years, Alberta’s fiscal debt will continue to grow during that period. According to the third quarter fiscal update, Alberta's combined fiscal and capital debt at the end of the 2018/19 fiscal year is estimated at $58.6 billion (our net debt, once you factor in our cash and physical assets, is only $28.1 billion). The NDP’s path to balance and proposed capital investments will see that total rise to $92.1 billion at the end of 2022/23. The UCP’s plan on the other hand is proposing to run operating deficits totaling $17.9 billion and a small surplus of $0.7 billion in 2022/23, meaning an additional $17.2 billion of debt over the four-year term. The UCP’s platform also commits to the existing capital plan through 2023, which would see the party add an additional $10.3 billion to fund those capital expenditures. This would bring total fiscal/capital debt at the end of a UCP term to $86.1 billion.

Alberta currently has the lowest net debt-to-GDP ratio in the country, and according to forecasts from RBC, either of these scenarios would see the province remain among the lowest by 2023. Given the small difference between the UCP’s projected debt at 2023 and the NDP’s, it would be completely egregious for either party to suggest that the other’s fiscal policies would put the province in an untenable debt position over the next four years.

Liberals and Alberta Party

Although neither the Liberals nor the Alberta Party lay out fully costed paths to balance yet in this election, both propose changes to the province’s revenue and spending that would impact the bottom line going forward.

The Liberals propose eliminating personal income tax for anyone making less than $57,250 a year, a 1% cut in income tax for all Albertans making above that amount, and lowering the corporate tax rate by 2%. They would also introduce an 8% harmonized sales tax (HST) to make up the difference in revenues. They have also promised to conduct “extensive value-for-money audits of Government spending” in order to identify efficiencies and redundancies that they claim will save money.

The Alberta Party promises a 2% cut in the corporate tax rate, elimination of the carbon tax, and an undefined cut to personal income taxes. Leader Stephen Mandel also pledges that under his government Alberta would establish the infrastructure to collect provincial taxes on its own rather than relying on the federal government to do it on our behalf, although it is unclear what exactly the intent or impact of that move would be financially.

Conclusion

The bottom line of the detailed paths to balance outlined by both the UCP and the NDP is that neither is likely to achieve its objective within the stated timeline. The fact that both are largely reliant on the completion of pipelines that are far from certain and on increasing natural resource prices, which are never guaranteed, makes it unlikely that our provincial books will be balanced by the next election cycle. The UCP’s platform has the added complication that it actively removes over $10 billion from the provincial revenue stream, and is therefore dependent on the questionable belief that a corporate tax cut will ultimately result in higher provincial tax revenues.

By failing to address our volatile and unreliable revenue base, the fiscal plans of both major parties will ultimately reinforce our historic dependence on unpredictable fossil fuel revenues, rather than stable and consistent taxation, to fund our public services and infrastructure. This guarantees that no matter who gets elected, Alberta will remain on the fiscal roller coaster for at least the next four years.

What the different paths to balance do reveal, however, is the widely divergent priorities and philosophies of the two parties, and what their platforms would mean for Albertans. The NDP’s fiscal platform prioritizes funding public services at a level that comes close to compensating for population growth and inflation going forward. The UCP platform, on the other hand, prioritizes cutting corporate taxes even if it comes at the expense of the province’s public services. It is also clear that neither party seems particularly interested in expanding our existing services in order to better meet the needs of Albertans. Neither party presents a clear path to balance, but they certainly identify paths to very different futures for Alberta.

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