Thursday, March 16, 2017

On Budgets and Deficits In Alberta

Today was budget day in Alberta.  More or less, the NDP government brought in the budget that had been expected.  Continued spending on big ticket items that have been put off for years, if not decades.

Predictably both the PC and WildRose opposition parties are crying foul.  The argument is largely that "running up the debt" is a bad thing.  I'd agree ... but for a few small details that both parties are ignoring.  Decades of PC unwillingness to put money into infrastructure has left Alberta's infrastructure years behind where it needs to be.  Edmonton's Misericordia Hospital is apparently in horrible shape; The Tom Baker Cancer Centre in Calgary has been past capacity for years.  The SW Ring Road in Calgary is desperately needed, and there is a laundry list of infrastructure needed throughout the province.

But, the cry from Alberta's right wing politicians is "don't spend during a downturn!".  Let's look at for a minute.

In the short term, this is an ideal time for the government to invest in infrastructure.  Interest rates are still at record lows, material costs are down in some areas, and labour costs will be down compared to what they were at the height of the last boom.  From an investment standpoint, this fits the "low" part of the "buy low, sell high" maxim.  Let's face it, infrastructure is never cheap - it's an investment.

In particular, the Tom Baker replacement has been on the books since sometime in the mid-2000s, and successive PC governments have deferred it time and again on the basis that "now wasn't the time", or "we can't afford it".  This kind of parsimonious thinking pretty much means that anything bigger than a cartful of groceries gets turned into a political football.

The next argument from the political right is that by accruing debt, we are saddling our children with these costs.  This is a more debatable point.  While I certainly have objections to operational deficits (and the NDP deficit includes operational deficit as well as capital spending deficit), it is foolish in the extreme to look at government debt so simplistically.

First, we need to distinguish between operating deficit and capital expenditure related deficit.  Rutherford tried to structure the books to make this distinction, but the brain trust in the WildRose squawked about it as "deceitful", instead of understanding the difference.

An operational deficit is something you might tolerate for a brief period of time - a year or two perhaps before making changes to operations to change cost structures.  Businesses deal with this all the time using revolving lines of credit.  Most individuals do this in their daily lives using credit cards.  When times are hard, we do whatever we have to in order to finance the basics of life - food, clothing, and shelter in particular.  If we're between jobs, or working a job which isn't quite carrying us, we put money on our credit card, or borrow against our homes as a short term measure.  We know it's not great, but we do it.  Alberta has been in the teeth of a downturn which has only just started to show signs of having reached its bottom.  An operational deficit at this time isn't great, but it's not the end of the world either.

Capital expenditures are usually much larger, and need to be dealt with differently.  Buildings, roads, vehicles are all examples of capital expenditures.  Individually, we make these expenditures by borrowing to fund them, and we repay that loan over time.  Few of us have the luxury of being able to plunk down $500,000 to purchase a house, or even $25,000 to purchase a car.  We take out loans to finance this.  On the scale that governments operate, hospitals cost billions of dollars (The new cancer centre in Calgary is expected to cost $1,500,000,000 - a somewhat larger number than your average house purchase), as do the roadways in our cities and towns.  Water treatment systems cost millions, the networks of pipes to our homes are worth billions.  It is not unreasonable for the government to borrow funds for these kinds of expenditures.

In the post-WWII era, our parents and grandparents invested willingly and heavily in one of the biggest infrastructure projects in human history.  New roads were built, cities grew, hospitals were added, water and wastewater infrastructure grew enormously.  They willingly paid taxes to help build this infrastructure, and to operate it.  Even here in conservative Alberta, we undertook these projects. Governments funded them by borrowing - often using bond funds and other investment vehicles as well as loans (anybody else remember the Canada Savings Bond? - that was effectively the government borrowing from its citizens).  We didn't build those roads using money that was at hand - we borrowed to do it then.  We need to borrow to do the same thing now.

Successive PC governments were already running deficits in the years leading up to 2014 (peak boom I will point out).  That was the first clue that we have a revenue problem in the government.  When oil prices tanked, and with it government royalty revenues (which are tied to market prices), it became abundantly clear that the tax revenues available to the government were inadequate.  In response, the NDP government has taken steps to correct this, including introducing a carbon tax (I would have argued for a sales tax in preference, but in this province, that's going to take a level of political will that I don't think even the NDP has).

On the drive home this evening, I heard the PCs going on about how government tax revenues were "drying up because nobody is working", and "the tax regime is so burdensome that companies are fleeing Alberta".  Yes, the investment landscape is changing, and capital is drifting away from the oil sands.  But, it is debatable how much that has to do with taxation.  Tax rates overall are much lower than they were during holy days of Ralph Klein.  Companies don't "flee" because of relatively minor changes in the tax regime.  Companies like Shell, Exxon-Mobil and others have operations in regions where the tax burden is considerably higher than it is in Canada, so this argument doesn't make a lot of sense.  The PC argument was basically "we're going to cut all the taxes and restore our tax advantage" - an advantage which simply was illusory at best.  Employment won't magically happen - the issues aren't simply one of giving energy companies a tax holiday.

We also have to acknowledge that the Permian Basin discovery in Texas is going to attract a lot of development dollars that Alberta is competing for.  It is a much less expensive to exploit find than Alberta's oil sands.  Given the recent "buy American" stance of the newly minted Trump administration, one can imagine that the American based companies will be very interested in focusing their energies there.  This is a political reality which the government of Alberta has little or no influence over.  Practically speaking, it means that oil sands _expansion_ will be at a standstill for the time being.  However, given that we charge next to nothing for the production from an expansion project, I don't see this as a bad thing.

The WildRose and PCAA arguments on this front are ludicrous.  Alberta's population is now the 4th largest in Canada.  We can't operate as if we are a wealthy family living on a trust fund any more.  It's time for Alberta to grow up, and face the fiscal realities directly.  It is ironic that it has taken an NDP government to actually face that reality.

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