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Sorry, folks. Tax hike only way out of this mess

Another provincial budget on March 16, another year of avoiding awkward subjects. Most commentary failed to note that transfers from the federal government have reached $8 billion — the second-biggest source of revenue after personal income tax.

Another provincial budget on March 16, another year of avoiding awkward subjects.

Most commentary failed to note that transfers from the federal government have reached $8 billion — the second-biggest source of revenue after personal income tax.

Money from Ottawa now accounts for about one out of every seven dollars the province spends. That does not fit with standard grumpy rhetoric but it's reality.

But the central point about the budget is that Alberta taxes are too low to support its spending — and have been for several years — and would still be too low to pay all the bills even if spending were cut drastically.

Most of the people who complain about borrowing and debt never suggest avoiding debt by raising what are still by far the lowest provincial taxes in the country.

By next spring, total debt will reach $45 billion. It will keep rising to $71 billion two years later. (Contrary to usual complaints, it won't all be due to NDP spending — a little over one-third of that $71 billion will consist of Teachers' Pension Plan obligations that former premier Ed Stelmach took on 10 years ago in a pre-election deal.)

Is the debt worrisome? It's going in the wrong direction. But the situation is nowhere near as bad as it was in the early 1990s.

Debt servicing costs peaked at 10.6 per cent of total provincial spending in the 1995-96 fiscal year. In 2017-18, debt servicing will account for 2.6 per cent of total provincial spending — and for 3.9 per cent by 2019-20. That's manageable.

The key is to find a way to stop the borrowing. There's the rub.

The new budget calls for a deficit of $10.3 billion in the coming year, dropping to $7.2 billion in 2019-20.

How could the government get to a balanced budget instead? How could it make up $7.2 billion?

Let's start with the easy assumption of another windfall. What if oil and gas revenues doubled? Oops, non-renewable resource revenues are already expected to rise by more than 70 per cent in the next three years. If they double instead, that brings in only about $1 billion more.

Public-sector pay takes up about half of provincial spending. What if we get all public-sector workers (leaving out physicians as a special case) to take a 10% pay cut this year and then freeze their pay?

The new budget expects total spending on those workers (teachers, nurses, jail guards and all sorts of other employees) to go up by 3.9 per cent by 2019-20. This year's total bill is $26.1 billion. If we make a technically possible although improbable cut of 10% — and don't lose a lot of experienced people and don't see the quality of new recruits suffer — we can reduce spending by $2.6 billion.

Let's throw in another $1 billion in savings on general principle. Maybe someone can find a way to squeeze contractor prices on new roads and schools.

Add up the three big changes and we've found $4.6 billion. Even if they all work out —oil prices would have to top $70 a barrel — that still leaves a budget deficit of $2.6 billion in 2019-20. And at that point, you'd think some of the austerity measures would have to be reversed.

But there would still be a big hole in budget plans that no one talks about.

Thriving resource industries remain the big hope for a stronger economy. The more that resource industries invest, the higher the pressure on wages and on infrastructure demands.

We're still building new schools and hospitals and highway overpasses because of growth brought about by resource investment before 2015. We're still dealing with high public-sector wages brought about by competition from high private-sector wages in the same period.

No economist that I know of has studied how much each billion dollars of private-sector investment in oil and gas adds to public-sector spending. All anyone can say is that the number is considerable.

Here's the consequence: if you're looking for a bounceback in oil and gas, you have to accept that new spending pressures will result.

The budget appears to discount that probability. One sign is its outlook for population growth. The documents say Alberta's population grew by 1.8 per cent in 2016, during a recession. The fiscal plan looks for a 76.5-per-cent increase in resource revenues over the coming three years — and a strong rebound in overall economic activity — but only a 1.4-per-cent annual increase in population. Apparently, no one will be moving here even if the provincial economy recovers sharply. Nor will population growth and industrial development result in new infrastructure needs.

These numbers don't add up. Future budgets will have to admit that economic growth creates spending pressure as well as creating revenue. That's why some Alberta government eventually will have to propose higher taxes.

Any politician who runs for election refusing to admit that — including the politicians whose hero seems to be Brad Wall, the premier who just raised Saskatchewan's sales tax — is not to be believed.

Mark Lisac

About the Author: Mark Lisac

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