EDMONTON – A leading economist says debt-free Alberta will have little choice but to sink back into the red in the coming years now that Premier Ed Stelmach has pledged not to increase taxes.
Jack Mintz, former president of the C.D. Howe Institute, says cutting spending or piling up debt are the only two options the province has left as it deals with a massive budget deficit. But major spending cuts would probably have a drastic impact on Alberta’s weakened economy, he says.
“I think the premier actually is right in the short run with the economy on its knees,” says Mintz, who has a PhD in economics and is head of a new school of policy studies at the University of Calgary.
“There is an argument for the province not to raise taxes at this point or even undertake major spending cuts, because it would simply slow down the economy even more and create more unemployment.”
Although the province has several billion dollars in various savings accounts that could be used to cover deficits during revenue slumps, Mintz says it won’t likely be enough to prevent Alberta from sliding back into debt.
“I expect the province will have much larger deficits than have been anticipated over the next three years,” he says. “The government will not be able to keep to a zero debt position without major cuts to spending, which they haven’t shown a strong desire to do.”
Premier Ralph Klein gave the province debt-free bragging rights in 2004 when Alberta paid off the last of $25 billion worth of debt built up after the last oil boom went bust in the early 1980s.
But slumping oil prices and the recession have battered the province’s economy.
Stelmach had already signalled there will be no major cuts to the largest budget items – health and education, which account for more than half of Alberta’s $36-billion budget.
And this week he squelched any speculation that his government was planning to raise taxes by categorically stating it wouldn’t. He even reversed a recently imposed tax increase on liquor, beer and wine that would have added $180 million to annual government revenues.
Roger Gibbins, president of the Canada West Foundation, says he’s surprised Stelmach would commit not to increase taxes, given Alberta’s economic uncertainty.
“Saying he’s never going to raise taxes ties his hands for the long-term,” Gibbins says. “It’s a strategy that might have to be re-thought if the economic situation doesn’t improve quite dramatically.”
Like Mitz, however, Gibbins says it would be a mistake for the province to scale back building projects or impose major spending cuts as an alternative to raising taxes.
“Spending cuts mean real cuts to wages and expenditures that would have a depressionary impact on the provincial economy,” he said.
“I don’t think this is a time to pull back on public sector spending when the private sector is pulling back so much.”
Paul Stanway, Stelmach’s communications director, threw more cold water on any suggestions that major spending cuts will be needed in the absence of tax increases.
“You’ll see an increase in the health-care budget next year, just like you saw an increase this year,” he said in an interview. “Education is another priority.”
“The premier is absolutely convinced that there are improvements we can make in the operations of government that will save us substantial dollars,” said Stanway.
“That’s the route we’re going to pursue.”
The liquor industry responded Wednesday with a release welcoming Stelmach’s decision to immediately rescind the higher mark-up on booze.
“This policy change, combined with the premier’s public commitment not to increase personal or corporate taxes, is a huge win for Alberta consumers,” says Jan Westcott, president and chief executive of Spirits Canada.
The April tax increase was having a devastating impact on the liquor industry, retailers and bars and licensed restaurants, said Westcott, who noted that in the first month alone, spirits shipments in Alberta had decreased by nearly 15 per cent. “The magnitude of the business loss was unprecedented and threatened employment and future investment in the province,” she says.