Governments have a reliable propensity to regularly increase spending.
Often this is understandable and makes sense. As our city, province, and country grows, so does the need for invaluable services like education and health care and infrastructure like schools, hospitals, roads, sewers, etc. Those additional services and pieces of infrastructure require additional frontline staff and bureaucrats as well as maintenance funds to function. When surveying attendees at Business After Hours a year and a half ago, the majority of respondents said they would not like to see cuts in key government services. However, most did not want to see increases in taxes either. This puts government in a tough place as they attempt to balance the budget, the tax burden, and the needs and demands of the people they serve.
In order to tackle debt and deficit issues, government can either: raise revenue organically through growing the tax base, increase tax rates, spend savings, take on debt, or cut spending. The only sustainable solutions are to grow the tax base, or control spending. For the purpose of this article, I’m going to focus on the need for government to control spending.
From 2010 to 2015 the population of Alberta increased by about 20%, from 3.5 million to 4.2 million people. Naturally that growth requires additional infrastructure and government services. Over the same period Government of Alberta expenses increased 26% from 2010 to 2015, from $38.4B to $48.4B. Reduced revenue from low energy prices and a slow economy has left Government of Alberta finances with a massive revenue gap and a ballooning debt. The GoA has spent a significant portion of the Heritage Trust Fund and borrowed upwards of $20 billion – enough to get our credit rating downgraded. While the overall balance sheet is still relatively healthy compared to our provincial peers, the current debt/deficit strategy is not sustainable. With royalty revenues unpredictable and unlikely to rebound to their former highs, government is faced with 2 options; reduce spending, or raise taxes. Surprising nobody, the NDP government has opted for the latter.
There is no cap on how much governments can spend, but there is a very real cap on how much a government can tax without seeing significant economic damage. Over the past year, the Government of Alberta has come very close to finding that cap by enacting a series of new taxes and tax increases. Corporate taxes, personal taxes, property taxes, gasoline taxes, tobacco taxes, liquor taxes, the imminent (and not revenue neutral) carbon tax and increases to payroll taxes, have all combined to increase the overall tax burden on individuals and businesses. We also can’t forget the push to $15 minimum wage by 2018 that will put significant pressure on businesses in the restaurant, hospitality, and food processing sectors as they attempt to cope with a 50% wage increases over just a few years. All of these changes have been enacted rapidly during one of the toughest economic times in our province’s history.
So can governments reduce spending? Whenever this question is posed, the answer is an inevitably political “what services would you like to see cut?” I would argue that like any business or household, Government does have the ability to reduce overall spending without cutting core services. It is absurd to think efficiencies could not be made in a government with upwards of 100,000 employees and a $50 billion budget. Despite having among the highest per capita spending on government services, many measurable outcomes remain mediocre or even poor. Immediately, this leads us to question the delivery and funding model that comprise our government services. Is the bureaucracy bloated? Are government workers overpaid? Do government procurement practices get us the best deal? Are taxes and regulations hindering economic growth? These are the questions we need to be constantly asking our elected representatives to ensure we are receiving the best possible value for our tax dollars. This should be especially the case at a time when many businesses and individuals have seen serious declines in their profits and take-home wages.
We should also be cognizant that Alberta has to be a competitive jurisdiction. Money is easily mobile. If the overall tax structure in Alberta is too high relative to other jurisdictions, individuals and businesses will choose to locate elsewhere. Economists are nearly unanimous in their claim that a lower tax burden spurs economic growth. We saw this when the Stelmach government undertook the royalty review in 2007. Drilling activity in Alberta took a massive hit, while B.C. and Saskatchewan saw activity increase. Unfortunately, businesses unable to move may find the additional tax burden unmanageable and have no choice but to close their doors.
Even with the changes in taxes the NDP introduced over the past year and a bit, Alberta still remains a competitive jurisdiction to do business, but that could easily change with the stroke of a pen. At some point the Government will need to reduce its reliance on royalty revenue and eliminate the deficit. With the overall tax burden already on the tipping point of uncompetitive, Government has to no choice but to reduce and control spending.
Reg Warkentin is the Policy and Advocacy Manager for the Red Deer and District Chamber of Commerce. He can be reached at [email protected] or 403-347-4491.
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