Don’t Blame the Oil Crash or Wildfires for Alberta’s Deficit

Poor policy choices deserve much of the blame for Alberta’s economic problems

By Steve Lafleur and Ben Eisen, The Fraser Institute

VANCOUVER, B.C. / Troy Media/ – Recent reports have blamed low oil prices and the wildfires in Fort McMurray for Alberta’s $10.9 billion deficit. But while the recent slump in oil prices hurt the province’s bottom line, and the wildfires were costly, Alberta would have been much better positioned to weather the storm if the provincial government had spent more prudently in recent years.

Consider that between 2004/05 and 2015/16, provincial government spending growth was considerably greater than the rate required to keep pace with population growth and inflation. Had the government increased spending more prudently during this period, at the same rate as population growth plus inflation, government spending today would be approximately $10 billion lower than it is and Alberta would face a much more manageable deficit of approximately $1 billion – about one-tenth as big as this year’s actual shortfall.

Of course, the current government can’t be reasonably blamed for spending growth that occurred before it took office. It should, however, be held responsible for the decision to continue increasing spending over the past year and a half, despite the clear need to get expenditures under control. Indeed, the recent fiscal update shows the government is undeterred by swelling budget deficits and will continue to increase spending. In short, the government is repeating the same mistakes that created Alberta’s fiscal mess.

Also, there’s a bigger problem with blaming oil prices alone for Alberta’s budget deficits – it’s symptomatic of a broader tendency to blame energy prices for everything wrong with the provincial economy without recognizing the how public policy choices contribute to the problems. And there’s plenty of evidence that they are.

Let’s start with the government’s decision last year to dramatically hike personal and corporate income taxes.

The government couldn’t have struggled to come up with a better strategy to undermine recovery. The economic literature is clear that higher corporate taxes curb investment and economic growth. For instance, an OECD study analyzed the effects of different taxes on economic performance and concluded that corporate taxes are “the most harmful for growth.” Similarly, research shows that high personal income tax rates reduce economic growth, investment, business formation, and job-creation – all of which Alberta needs more of, not less.

The government has also introduced economically damaging regulations. For example, it set in motion a plan to significantly increase the minimum wage (by a total of 47 per cent) over several years despite overwhelming evidence this will increase unemployment, particularly among young and low-skilled workers.

In the energy sector, the government got off on the wrong foot, stoking uncertainty among investors by announcing plans for a royalty review. It has since announced there will be no rate increases until 2017, quelling concerns about immediate hikes. But the prospect of future increases remains a concern. The government has further contributed to uncertainty in the sector by announcing an overall “cap” on oilsands emissions, which could restrict energy sector growth and lead to billions of dollars being left in the ground.

Finance Minister Joe Ceci recently stated that “economic headwinds facing Alberta remain strong.” That is certainly true but low energy prices aren’t the only contributor to those headwinds. Policy choices that stoke economic uncertainty, undermine growth, and cause the budget deficit to balloon deserve much of the blame for Alberta’s economic problems.

Steve Lafleur and Ben Eisen are analysts with the Fraser Institute’s Alberta Prosperity Initiative.

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