BUSINESS

THE RED AND THE BLACK

Alberta and New Brunswick tackle their deficits with more cuts

MARY NEMETH March 6 1995
BUSINESS

THE RED AND THE BLACK

Alberta and New Brunswick tackle their deficits with more cuts

MARY NEMETH March 6 1995

THE RED AND THE BLACK

Alberta and New Brunswick tackle their deficits with more cuts

BUSINESS

Ralph Klein still has his trophies: awards from the Fraser Institute and the National Citizens' Coalition, accolades from the prestigious financial newspaper, The Wall Street Journal. And now Alberta's Conservative pre-

mier has a new accomplishment under his belt—last week, provincial Treasurer Jim Dinning announced that, in the past year, Alberta ran its first budgetary surplus in a decade, thanks largely to windfall oil-and-gas revenues. But that happy message had scarcely escaped Dinning’s lips when he uttered the bad news. The treasurer announced a 1995-1996 budget that is projected to run $506 million in the red, despite continued hardline spending restraints and fee hikes. “This is a stay-the-course budget,” declared Dinning. “There is one more tough year ahead of us, and then 90 per cent of our spending cuts will be done.”

That stay-the-course budget, however, had an unintended side-effect: it means that, suddenly, Klein’s Alberta is no longer the solo act of Canada’s deficit elimination show. Three time zones away on the same day, New Brunswick Premier Frank McKenna’s Liberal government announced a surplus budget for 1995-1996—the culmination of eight hard years of deficit slashing. And a week before that, Saskatchewan’s New Democratic government announced surplus budgets for both the past year (1994-1995) and the year to come (1995-1996). For his part, however, Klein remained unperturbed. “We could do like Saskatchewan or New Brunswick did and I could balance the budget tomorrow,” said the premier. “All I’ve got to do is raise taxes by a point. But part of the Alberta advantage is to keep our tax structure as low as we possibly can.”

In fact, New Brunswick, like Saskatchewan, did blend spending cuts with tax increases over the years to reach its balanced-budget

targets. McKenna increased the personal income tax rate—which stood at 60 per cent of the basic federal tax in 1991—to 64 per cent over two years, although he is offering modest tax relief and no personal tax hikes in his latest budget. On the spending side, New Brunswick froze civil service salaries and streamlined education and health care. And it has eliminated the equivalent of about 2,400 full-time civil service jobs—with 400 more set to go in the year to come. Overall program spending, however, is projected to remain unchanged at $3.7 billion in 1995-1996.

Alberta, by contrast, has held the line on taxes—a few user fees notwithstanding.

Instead, it has implemented deep spending reductions that will continue this year when another 597 full-time civil servants will lose their jobs—on top of the 4,500 that were cut over the past two years. In all, Klein’s government is lopping off 3.8 per cent, or $478 million, from program expenditures in 19951996. More than half that decrease, $276 million, will come out of the health-care budget. At the same time, Klein’s government boosted health-care premiums again: they will rise by $24 per person to $408 a year, or by $48 per family to $816 a year—netting the government an extra $58 million. Both the health cuts and rate hikes drew fire from

anti-poverty groups and from the opposition. “Health-care premiums are one of the most regressive and pernicious taxes,” declared Liberal Leader Grant Mitchell in the halls of the legislature after Dinning’s budget announcement. “And it is the average Albertan who is paying for these cuts.”

The average Albertan, however, actually supports the government’s deficit elimination efforts, recent polls show, although a majority oppose certain elements of the plan, like paring back kindergarten funding from 400 hours a year to just 200. In its latest budget, the government responded to public criticism by budgeting an extra $10 million for kindergarten—to cover 240 hours of instruction for each child this year. But changes in accounting methods made

cuts in education spending seem even more benign. Last year’s budget document projected a 12.4-per-cent reduction in education spending over the four years of the deficit elimination campaign. The budget document released last week shows a 6.6-per-cent decline over that period—a difference due almost entirely to the new accounting method.

Though confusing, the new figures actually show a more complete picture of government spending and revenues. Equally confusing—and open to interpretation—are economic indicators. Government budgets are based on a host of suppositions that can sometimes go wildly off track. In 1991, for example, then-Alberta Treasurer Dick Johnston introduced what he said would be a balanced budget, based on projections that oil would go to $23 (U.S.) a barrel. When the price increases fell well short of that mark, Johnston’s budget was more than $1 billion in the red.

Last week, the opposition in both Alberta and New Brunswick lambasted government estimates, though for very different reasons. In New Brunswick, critics charged that the government’s projected $100-million increase from tax revenues—because more people will be working—is overly optimistic. The critics

also noted that it is no coincidence that the “good news budget” serves as a possible prelude to an election this year. Still, McKenna’s other economic projections seemed relatively conservative. The province is assuming real economic growth of 2.7 per cent for 1995, close to the 2.8-per-cent projection by the Atlantic Provinces Economic Council, a Halifaxbased forecasting organization. “That figure is quite realistic and sustainable,” said APEC chief economist Maurice Mandale.

For its part, Alberta is also projecting 2.7-per-cent growth for this fiscal year. The difference is that most independent analysts, at banks and investment institutions, are predicting a provincial growth rate of about 3.5 per cent Using a unique and complicated set of calculations, Alberta has also built in a $391-million “cushion”—oil and gas and corporate tax revenues that the government expects to receive, but is not counting in the budget. For example, the Alberta government

estimates that oil prices will average $18 (U.S.) per barrel in 1995-1996 and that gas prices will average $1.50 per 1000 cubic feet—reasonable estimates to begin with. If those numbers are correct, the government would expect to collect $2.5 billion in natural resource taxes. But for budgetplanning purposes, the government only counts 90 per cent of that $2.5 billion.

Critics claimed that Dinning deliberately lowballed revenue projections to make the fiscal situation seem worse than it is—and to maintain support for curtailed spending. ‘Within several $100 million,” said Ross Harvey, leader of Alberta’s New Democrats, “a creative provincial treasurer can make the budget say virtually anything he wants.” But Dinning denied any attempt to manipulate the numbers, saying that the volatility of oil and gas prices have led to government revenue crashes in the past. “I’m doing what any treasurer should do,” he said, “and that is budget conservatively.”

Whatever the Alberta government’s intentions, it faced an awkward contradiction last week: the modest 2.7-per-cent economic growth projection hardly coincides with Premier Klein’s promise of an “Alberta advantage”—an economic boom bom of low tax rates. The province’s debt was the subject of equally contradictory messages. When Klein went on TV in January to deliver a provincial pep talk on the importance of sticking to spending restraints, he insisted that “our provincial debt is close to $32 billion.” Last week, however, when Dinning introduced legislation that would mandate payments on the provincial debt each year after 1997, the treasurer talked only of eliminating the $8.3-billion net debt—that is, the $31.7-billion gross debt minus $18.3 billion in assets and $5.1 billion in pension liabilities. Dinning pointed out that the government has a separate plan in place to eliminate pension liabilities. And he said that interest earned on such assets as Heritage Fund investments offset interest payments on a large part of the debt. It is only on the $8.3-billion net debt, he argued, that the province is “vulnerable.”

Opposition Liberals accused Dinning of minimizing the magnitude of the problem. They say that he should tackle a bigger chunk of the debt. But if Dinning comes off sounding soft on debt, he is certainly hard when it comes to economic projections. That may make good political sense, perhaps good economic sense, too. But it also means that Alberta is planning on a deficit next year, while others provinces are projecting surpluses.

For now at least, Saskatchewan and New Brunswick appear to have outpaced Alberta in the deficit elimination race.

MARY NEMETH

in Edmonton with

JOHN DEMONT

in Halifax