Cutting taxes leads to underfunded services
A budget lesson the government 
doesn't want to learn

Tom Fuller, USWA

The 2002 Alberta Budget has a split personality. Personality A (for Alberta Advantage) is bubbling over with good news. Economic growth is expected to remain strong in a province that already has the highest real GDP in the country. We have the highest rate of investment and the lowest unemployment rate among provinces. In personal disposable income, we rank second only to Ontario. Our rate of business growth is miles ahead of the rest of Canada.

As a result of this abundant good news, life in "Ralph’s World" continues to unfold as it should. Provincial taxes, already the lowest in the country, will fall even further this year. At least, that is, for business. For the coming year, business income tax rates will fall by half a percent, reducing the tax bill for Alberta companies by about $81 million. This comes on top of $286 million savings these companies got from last year’s tax cuts.

Personality B (for Bad News, or perhaps for energy Bubble) paints a very different picture. The world, it appears, is a strange and terrible place. The global economy is subject to periodic downturns, one of which is happening right now. Worse yet, energy prices, which provide a big chunk of provincial government revenues, turn out to be volatile, bouncing up and down like a jackrabbit on angel dust.

As a result of this bad news, Finance Minister Pat Nelson has been forced to give Albertans a dose of strong fiscal medicine. "Sin taxes" on cigarettes and alcohol are going up. Health care premiums (which the government assures us are not taxes) are going up by about 30%, and a bunch of other fees (e.g. for driver’s licences) are also rising.

At the same time, Provincial Health Authorities warn that budget constraints mean the public will have to lower (again?) its expectations of the health care system, and the health care workers will have to adjust their wage demands a long way down. In addition, $631 million dollars in spending previously committed to patch up the province’s decaying infrastructure will now be put on hold.

Still, the budget assures us that life in Alberta is just getting better, unless you drink or smoke or get sick. Or, unless you have children in our school system, or drive on our roads.

There is, of course, a connection between Personality A (Good News, Low Taxes) and Personality B (Bad News, Low Revenues). The revenue shortfall of $1.6 billion expected this year certainly reflects low forecast energy revenues. It also, however, reflects the loss of $1.1 billion in tax revenues as a result of the government’s "flat tax," and a further $367 million drop in business taxes over the last couple of years.

In other words, the Government of Alberta cut taxes, hoping that high energy prices would fill the revenue gap. When energy prices fell, the government cut services in order to maintain the Alberta Advantage.

Since the budget came down in mid-March, energy prices have bounced back to levels about 25% above budget predictions. This should result in another huge surplus at the end of the year, which the government will announce as a wonderful surprise.

And yet, volatility in energy markets should surprise no one, least of all the Alberta Government. During the years of multi-billion dollar budget surpluses, the Klein Tories regularly trotted out their favourite economist, Dr. Paul Boothe, to lecture MLA’s, the public, and public sector unions about the danger of volatile energy revenues. Why then, did this same Government introduce huge tax cuts that made the province more dependent on these same volatile energy revenues?

The answer, of course, is politics. The Klein Government has never believed in public services. That’s why, when the province runs surpluses in the billions of dollars, the surplus goes to "pay down the debt" rather than to improved health care or education. That allows the government to cut taxes and then, when energy revenues fall, cut services even further.

This hostility to the public sector has been the one constant in government policy for the last decade. It reconciles the two halves of the budget’s split personality better than a dose of anti-psychotic medication.

What it does for Albertans is another question.