“Stop the world, stop the world…I’m getting off…” Stone Roses rock song lyric.
Seems like a fitting sentiment for these angry post-election days.
Prairie alienation and anger are all the rage in the Canadian media. It reminds me of the 1990’s when Canadian publications exchanged vitriolic back and forth between the angry Westerners and angry Quebeçois. Reform vs. Bloc. Nationalist vs. Separatist. West vs. East.
All the drama sure sells newspapers. It’s mostly nonsense. Politically motivated. Over-dramatic grandstanding by opportunistic politicians. The ramblings of the political puppets.
Fast forward to today. The ramblings persist. Alberta’s political response to the Federal election? Tough talk on separation and another neoliberal-style austerity budget filled with threats of more pain to come.
What Albertans Under Pressure Do Not Need
Increases to their personal income taxes through de-indexing and credit removal
Higher costs throughout society
Public sector layoffs
Delays to infrastructure renewal and expansion in a growing province
Corporate tax cuts that put a $2 Billion hole in the budget
No sales tax revenues
More cycles of Household Wealth Evaporation
A traveling roadshow through the province to sell a budget based on a trifecta of unlikely events: no global recession, no cancelled pipelines, rising resource revenue royalties. A gamble at best.
What Albertans Do Need
Jobs. Income to spend to get the economy moving and on its way back to full employment…or at least down from 6.6% to 3%. 3% is the sweet spot where frictional unemployment exists but inflation is held in check.
Policy ensuring a legislated portion of natural resource revenues are invested in the Alberta Heritage Trust Fund and that investment gains cannot be accessed / squandered by politicians and their handlers. For the post-oil future.
A Provincial Sales Tax. A tax structure outside of resource revenues that supports the levels of government spending typical in the province.
An end to Household Wealth Evaporation.
Full Employment or 3% Unemployment – How to get there
University of Calgary School of Public Policy states, “With global policies focused on decarbonization and technological innovations around shale oil and gas and fracking, the growth in the demand for oil from traditional oilsands projects is expected to decline.”
The election showed that, in Alberta, a majority of voters do not accept climate change and the resulting effects that this change is imposing on western world economic drivers.
Of course one can’t suddenly eliminate production of all oil and gas but the unwillingness to accept that change is occurring is essentially the major policy mistake Alberta is making.
This is difficult to understand looking at the leadership Alberta has displayed under past governments. For example, the first wind farm was set up by the Alberta government near Pincher Creek Alberta nearly 40 years ago.
Alberta, rather than fighting the changes that are coming, should be preparing for the ultimate reduction in oil and gas production and start encouraging job growth in new industries.
Research by economists Pollin, Heintz and Garrett-Peltier from the PERI Institute at the University of Massachusetts found that the best job creation investments by government are in the education and clean energy/efficiency/renewables sectors, not in fossil fuels.
Job Creation through each $1 Million in Spending
Education – 26.7 jobs
Clean Energy / Efficiency / Renewables – 16.8 jobs
Military Spending – 11.2 jobs
Fossil Fuels (oil, coal, natural gas) – 5.2 jobs
These results are due to the relative labour intensity as well as the relative domestic content of these positions. In other words, better job creation requires activities to happen at home; teaching students the importance of critical thinking, learning from historical precedent, managing their money and diversifying their economy, jobs retrofitting homes, updating electrical grids, etc.
Alberta Heritage Trust Fund (AHTF)
The Heritage Fund is Alberta’s main long-term savings fund. The Fund was established in 1976 by Progressive Conservative Premier Peter Lougheed to collect a portion of Alberta’s non-renewable resource revenue for future generations.
AHTF – established in 1976 – value $18.1 Billion CAD – Alberta population 4.37 million
Norwegian Government Pension Fund Global – established in 1990 – value $1 Trillion USD
Norway’s population is 5.2 million people. That means that for each Norwegian citizen, the government has a pension amount of $192,307.69 USD put aside.
Alberta has managed to put aside $4,141 CAD per citizen.
Unfortunately, Alberta politicians have used the fund as a way to keep taxes low while providing high level government services. Sounds like a great deal right?
The reality is that Alberta has historically suffered from the boom and the bust. Energy revenues rise, government expenditures rise. Energy revenues drop, governments don’t have enough non-resource revenue and impose austerity.
Initially the Heritage Fund took 30% of energy revenues and put them directly into the fund. In 1982 that percentage fell to 15%. In 1987 it fell to zero.
50 years of data show that government policy choices have allowed “volatility in energy revenues to create volatility in the budget.” “This policy choice has resulted in occasional bouts of severe spending contractions and likely encouraged higher rates of [government] spending and lower taxation than would otherwise have been observed.” – University of Calgary School of Public Policy, Kneebone and Wilkins.
In other words, governments keep burning through the fund to support general budget expenditures when resource revenues fall.
Like they did in Norway, non-renewable resource revenues should be saved, invested and turned into a monetary asset.
The recently announced corporate tax cut (October 2019) will cost $4.5 Billion by 2022. The plan is to go from 12% to 8%. Try 10% and you’ll still be the lowest in the country while saving a couple billion.
and most obviously…
A 5% Sales Tax would raise $5 Billion/annually according to University of Calgary economics professor, Ken McKenzie
The problem in Alberta is that, due to the resource revenues, politicians and the electorate suffer from fiscal illusion. This occurs when the government finds indirect ways of funding expenditures. Indirect meaning resource revenues, not taxes.
Correspondingly, the electorate doesn’t understand the true costs of publicly provided goods and services but expects them nonetheless.
The most direct ways of extracting revenues from the electorate are from income taxes and sales taxes. The least direct way of extracting revenues is from taxing the rents earned on the development of natural resources.
Albertans are used to this indirect method, they hate the idea of higher taxes, the government obliges and the energy rollercoaster ride continues.
A Reason to End the Rollercoaster of Household Wealth Evaporation
With every boom there comes a bust. With each bust comes evaporation of household wealth.
“Households will reduce their spending by between three to five cents for every dollar of wealth lost.” – Robert Pollin, MIT
Economic busts followed by austerity wreak havoc on your society as well as on any forward looking innovation or business planning that requires a modicum of certainty about future growth trends.
Alberta’s up and down economy over the past 50 years has been anything but certain. And it should not come as a surprise when it happens again.
Today, we’re looking at the 3rd iteration of the bust cycle in 50 years.
It’s time to learn lessons, fund Alberta’s government expenditures through non-resource revenue income, implement obvious taxes and protect your citizens’ wealth, end the fiscal illusion, build up the Alberta Heritage Trust Fund to establish stability and certainty, and expand industrial opportunities with an eye to a future where traditional oil sand revenues have declined.
However, it’s much easier to join in the delusional ramblings of politicians stoking the divisive flames of separation.
Unfortunately, these politicians are in this for themselves and the separation card is used to foment distraction from the structural problems on hand in Alberta.
It’s too late to separate. If the Alberta Heritage Trust Fund contained half a trillion then you’d have a leg to stand on. As it is today, the political bluster is just that. Bluster.
Folks, it’s really hard, expensive and divisive to separate. Just ask Quebec.
One of my hobbies is blogging about mortgages, debt and government policy. During the day I’m a MORTGAGE BROKER!
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