I my last episode, I tried to establish an historical rationale for Alberta's current deficit. In sum, I had tried to make the case that our deficit is largely the result of the historical neglect of government investment. I have since realised I needed go deeper into certain areas of Alberta's history to increase the strength of my argument, and this post is such an attempt. I feel that the finances of the Alberta government demand more scrutiny; so too does an examination of the Alberta government from the day it paid off the debt to its defeat in May 2015. We'll leave the latter for later, and dive into Alberta's crappy fiscal situation - one the NDP inherited, rather than created.
Alberta's Deficit History
It may be popularly believed that deficits started with the NDP, but a quick examination of budget tables (like this one: http://www.rbc.com/economics/economic-reports/pdf/provincial-forecasts/prov_fiscal.pdf) reveal the provincial government had only run a single budget surplus since 2008. That, of course, was the year of the likely misnamed "Great Recession." Is the Great Recession wholly to blame for Alberta's running deficits from 2008 to the present?
Alberta Government Priorities
During the 1990s, Alberta had cut the budgets of its services both broadly and deeply in the name of fighting a "debt crisis." The revival in the price of both Oil and Natural Gas in the mid-1990s allowed the government of Alberta to defeat this boogeyman in no time once-soever - this partially because the debt was never that big to begin with.
Having eliminated the provincial debt, the government was faced with two courses of action. It could either play catch up in its massive infrastructure deficit, which I discussed earlier, or it could use its fiscal wiggle room to cut taxes. Of course there were other possibilities, like investing surpluses into the Heritage Fund - but I doubt this was ever a serious priority. Using debt to finance the "catch up" was totally out of the question, so budget surpluses would have to provide the funding for Alberta's myriad issues, something even the great surplus of 2007 was likely inadequate.
It should be remembered the make-up of the Alberta government in the later Klein years, and before the rise of the Wildrose Party. The PCs were the dominant political party in Alberta, but they dominated the over-represented countryside, while the cities were more of a competition with the Liberals and NDP (and later, Alberta Party). So while the PC Association was as big a tent as one could imagine, the center of gravity for the government actually lay in its rural representatives - who would one day be replaced by Wildrose MLAs.
It is probably not surprising then that the Alberta government, having defeated the debt, listed through a series of tax cuts, as this was most agreeable to the future Wildrose heartland. Alberta was a cheap place to have a business, and be rich. Money was indeed invested in infrastructure - but a drive across the province will reveal where most of the money went: rural ridings, with hospitals, airports, paved roads and new schools, while cities languished. The tax cuts did come at a steep price: billions of dollars in stable revenue each year, lost; and Alberta made itself more vulnerable to a danger looming on the horizon.
The Transition to Oil Sands Oil
Revenue from oil royalties, land sales and leases began to make up more and more of Alberta's government revenue. The rise in oil prices to record highs in 2008 masked a great transition underway in the province. Natural gas revenue had already disappeared with the cratering of its international price - and now oil was going the same way. Obviously, not because oil was worthless, but because of the royalty rules the government had established in the past.
To encourage development in the Oil Sands, the government had granted very generous concessions to oil companies investing in the province. These concessions allowed companies to recoup 100% of their investments before the Alberta government would begin to receive a share of the investment, a share that was considerably lower than the royalty levied on "conventional" oil.
Around 2007, the new Premier, Stelmach, was faced with a dilemma. In our rush to exploit our resources as rapidly as possible, we had exhausted the majority of our conventional oil reserves. As most of Alberta's oil production now came from the unconventional oil sands, the province was poised to lose billions of dollars in revenue as oil royalties disappeared in the short term. Accordingly, he began a royalty review. The result was no increase in oil royalties, but a whole lot of corporate support going behind the Wildrose Party.
So Alberta began a series of deficits. These were masked by the global economic crisis - but I encourage you to examine the graph I linked to above. You will see other oil exported provinces were running surpluses while Alberta was mired in deficits. Something uniquely Albertan was occurring.
The Latest Collapse
When Jim Prentice became the Premier of Alberta, he too was faced with a dilemma. The price of oil was imploding, thanks to price manipulation out of the Middle East and the American Shale boom. The Shale boom had done Alberta a massive disservice by eliminating our only real customer: the United States. Alberta had all this oil, and nowhere to sell it.
Investment was already plummeting and people were being laid off when he admitted that his government was going to have to raise taxes, cut services, and still run a deficit over $5 billion. He acknowledged the province was on a "resource roller coaster" (viewable here http://www.macleans.ca/wp-content/uploads/2016/04/fig1-1.png) and it needed to get off. Then he lost the election and disappeared.
A Downturn Like No Other, or where we are today
The NDP inherited a massive mess when it took office. The tax increases they effected did little to fight the size of the deficit, as the hole left by cratering royalties and leases destroyed any chance they had of balancing the budget. Further, they realised they did have to spend money in order to prevent the damage from spreading from the oil sands and overwhelming the rest of the provincial economy. Cutting provincial employees and services would not only stress communities further, but would also encourage the spread of the oil collapse throughout the province.
The largest employer in Alberta was not the natural resources industries, but construction. The decline in oil sands in activity had already put tens of thousands of workers out of work, but as many were "fly-out" workers from elsewhere, their absence was mostly felt in Alberta's busting hotel industry. There was a significant danger to the province if more of these people lost their jobs. Their unemployment would lead to a bigger housing bust, bigger out migration, increased government costs, and likely more crime (as was experienced in Edmonton). The bad wave coming from the oil sands would only get bigger as it picked up construction workers and laid them off.
It wasn't that long ago that the heads of Alberta's construction industry stated they would be out of work to do by this year. Fortuitously, there is a government willing to spend to keep these people working. As I've argued elsewhere, the government is leading a charge on infrastructure that should have been done decades ago. So, while the recession is the worst since the 1980s - the province is experiencing, in contrast, a lower unemployment rate and a lower emigration rate. As an added bonus, that debt the government is raising is cheaper than the debt it was being burdened with in the 1980s by several orders of magnitude.
There was simply no way of avoiding a budget deficit. Past inaction had cursed the Alberta government, regardless of who is premier, with one. Albertans elected the party that promised to do the most to get Alberta off the "resource roller coaster," and the party that promised to rebuild the province. They are trying to that - we shouldn't be surprised it comes with a price.
Thanks for reading.
A discussion of politics, science, emerging technology, and international affairs all centred on Alberta.
Showing posts with label taxes. Show all posts
Showing posts with label taxes. Show all posts
Tuesday, 30 August 2016
Monday, 29 August 2016
An Historical Argument for a Deficit
When I was a younger man, I did the first part of my teacher training at a High School in North Calgary. During our orientation we were told not to go into a certain room while a certain class was in session. To do so would be to break the fire code: the room was already so crowded students were sharing desks, and just one of us would push things over the edge. During my brief stay, I also learned that almost none of the students - this in a residential neighbourhood - could not walk there; the school's placings where reserved for the students who lived further to the north. Local students would also have to be bussed south, to the schools closer to downtown, as nothing existed to serve the city past this place. I commented that it seemed like Calgary was built like a refugee camp - all houses, with services to follow. The professor who I addressed could only mumble in agreement.
That was only a few years ago. Alison Redford was premier; then Dave Hancock, and then Jim Prentice. During the latter's short term as premier designate he had to admit, that due to the low price of oil, the province would have to make cuts and raise taxes - which is interesting, as the province had been in deficit for several years already. He even briefly proposed a sales tax - one of those famous "trial balloons" of which he was so fond. An election was called, and he, and the PCs, lost, and lost badly. They also lost in the most unexpected of ways - to an NDP that promised no cuts to essential services and to raise taxes higher than the PCs were comfortable.
So far, the NDP have done as promised. There have been cuts - especially to the gargantuan piggy trough the PCs had installed across the province. As promised, there were no cuts to essential services, though they didn't greatly increase spending in these areas, either. The tax raises were large by the standards of the Alberta legislature, but it must be acknowledged that taxes on almost everything are lower today than they were under Ralph Klein, sin taxes excepted. The only new tax of any significance was the Carbon Tax - which has yet to go into effect.
But, there is the elephant in the room: there is not just a deficit. It is a relatively big deficit. So in spite of the tax increases, the deficit went up, too. However, this is reflective of two things: one, that Alberta was excruciatingly dependent on oil revenue (not just royalties, but land sales and leases), and secondly, taxes are still too low to provide the acceptable minimum of services to the population.
There is a third major factor in the "massive" deficit the NDP is running at the moment. That factor is history.
After the downturn of the 1980s, Alberta was, as one book had it, "the Second Promised Land." The population of the province almost doubled in the time that I have been alive. Though our high birth rate is part of the story, the majority of the increase was from immigration, from Canada and abroad.
Arguably, having children is less of a fiduciary burden on society than immigration. While a newborn requires hospital services (sometimes a lot of them), and will one day come to engage in our 15+ year education system, a newborn does not require its own home. It does not require new roads. It does not require the infrastructure a mature adult immigrant requires immediately upon arrival in a given place. Further, immigrants come with their own families too - so much of the services a newborn would receive are received by an immigrating family, too. Go anywhere in the East of Canada and you realise the people who came here were the young - in some cases, all the youth and young families of some communities moved here.
This is not necessarily a bad thing. I am a firm believer that we can do as much as we wish to do; only a lack of ambition really holds us back. The Alberta these people came to in the 1990s had no other ambition than to pay off the provinces debt. Nothing else mattered, and herein lay the problem.
The population of Calgary almost doubled in the past 30 years. However, in that time, almost nothing was done to accommodate all these people - except build wasteful suburbs. Calgarians could look back and remember a city with the highest homeless population in the country; a city with no new schools; a city with its own "highway of death" (the 22X if you didn't know); a city with a massive poverty problem (in 2005 about 40% of adult Calgarians lived at, below, or just above the Canadian government's Low Income Cut-Off). But at least here you could find work.
Consider the school question. No high schools were opened in Calgary between 1991 and 2005, when Bishop O'Byrne and Centennial opened. Lord Beaverbrook High School had the highest student population of any in Canada - over 3000 - making it larger than many of Canada's universities at the time. Since those two schools opened, only two more have opened, with another opening this fall. In that time the population of the city grew by a half-million. High Schools are not cheap - they require a lot of land, technical engineering, and investments in technology, not to mention upkeep. So we just didn't bother. When one friend ran in the provincial election in Northwest Calgary, we discovered his constituency - a very new one - had only six schools for a population of 55,000, equal to the population of Medicine Hat. Promises made for schools in the early 1990s were simply never honoured. All over Calgary, and I would imagine, Alberta, there were hundreds of fields in residential neighbourhoods that were meant to house schools. Those schools never came, at least until the NDP were elected. The irony was delicious when one PC MLA was quoted in April 2015 talking about how ridiculous it was that his daughter's kindergarten class had 30 pupils. If only there was something he could have done about it.
Ralph Klein famously had blown up half the hospitals in Calgary during the 1990s. The situation in Edmonton was no better. Again - with a booming population, but also with a population with some abnormally high levels of obesity and drug use, among other ailments. There was a persistent shortage of doctors and nurses, and I'm sure many people remember the difficulty in finding a family doctor ten years ago. Health Care services were increasingly privatised - which served to drive up health care costs, in all areas studied, while the cost of dentistry skyrocketed relative to neighbouring provinces.
Infrastructure was - and remains - far behind the needs of the province. With support from the Federal government, the LRTs in Calgary and Edmonton were expanded. Consider the case of the ring road in Calgary - its development has literally taken half a century. Some progress was made - we no longer have "highways of death" south of Calgary and from Edmonton to Fort McMurray; but much of Calgary remains in gridlock due to a combination of poor planning, poor development, and a historical lack of leadership.
The PC government of Alberta was caught in a bind. They had paid off the province's debt - but had lowered taxes too much. When oil royalties started drying up in the mid-2000s, thanks to the transition from "conventional" to "unconventional" oil, the government preferred to do nothing than either raise taxes or debt finance - such was the power of Alberta's low tax, no debt myth. Well, that myth has cost us. Jim Prentice at least had some bravery to confront the power of that myth and accept reality, but his steps were too few, too short, and too late. He did acknowledge something else though: the downturn had brought with it decreased cost of business and lower interest rates. Government spending had not been so cheap in years.
We now have a government willing to raise revenue and use debt finance, and they are doing it. There is much dismay about the size of the deficit - but all people can criticize is the amount civil servants get paid. Apparently, the government isn't blowing this money on unnecessary crap - I am sure we would know about it by now. They are doing what had to be done ten and twenty years ago, today. Perhaps we should be thankful.
Thanks for reading.
That was only a few years ago. Alison Redford was premier; then Dave Hancock, and then Jim Prentice. During the latter's short term as premier designate he had to admit, that due to the low price of oil, the province would have to make cuts and raise taxes - which is interesting, as the province had been in deficit for several years already. He even briefly proposed a sales tax - one of those famous "trial balloons" of which he was so fond. An election was called, and he, and the PCs, lost, and lost badly. They also lost in the most unexpected of ways - to an NDP that promised no cuts to essential services and to raise taxes higher than the PCs were comfortable.
So far, the NDP have done as promised. There have been cuts - especially to the gargantuan piggy trough the PCs had installed across the province. As promised, there were no cuts to essential services, though they didn't greatly increase spending in these areas, either. The tax raises were large by the standards of the Alberta legislature, but it must be acknowledged that taxes on almost everything are lower today than they were under Ralph Klein, sin taxes excepted. The only new tax of any significance was the Carbon Tax - which has yet to go into effect.
But, there is the elephant in the room: there is not just a deficit. It is a relatively big deficit. So in spite of the tax increases, the deficit went up, too. However, this is reflective of two things: one, that Alberta was excruciatingly dependent on oil revenue (not just royalties, but land sales and leases), and secondly, taxes are still too low to provide the acceptable minimum of services to the population.
There is a third major factor in the "massive" deficit the NDP is running at the moment. That factor is history.
After the downturn of the 1980s, Alberta was, as one book had it, "the Second Promised Land." The population of the province almost doubled in the time that I have been alive. Though our high birth rate is part of the story, the majority of the increase was from immigration, from Canada and abroad.
Arguably, having children is less of a fiduciary burden on society than immigration. While a newborn requires hospital services (sometimes a lot of them), and will one day come to engage in our 15+ year education system, a newborn does not require its own home. It does not require new roads. It does not require the infrastructure a mature adult immigrant requires immediately upon arrival in a given place. Further, immigrants come with their own families too - so much of the services a newborn would receive are received by an immigrating family, too. Go anywhere in the East of Canada and you realise the people who came here were the young - in some cases, all the youth and young families of some communities moved here.
This is not necessarily a bad thing. I am a firm believer that we can do as much as we wish to do; only a lack of ambition really holds us back. The Alberta these people came to in the 1990s had no other ambition than to pay off the provinces debt. Nothing else mattered, and herein lay the problem.
The population of Calgary almost doubled in the past 30 years. However, in that time, almost nothing was done to accommodate all these people - except build wasteful suburbs. Calgarians could look back and remember a city with the highest homeless population in the country; a city with no new schools; a city with its own "highway of death" (the 22X if you didn't know); a city with a massive poverty problem (in 2005 about 40% of adult Calgarians lived at, below, or just above the Canadian government's Low Income Cut-Off). But at least here you could find work.
Consider the school question. No high schools were opened in Calgary between 1991 and 2005, when Bishop O'Byrne and Centennial opened. Lord Beaverbrook High School had the highest student population of any in Canada - over 3000 - making it larger than many of Canada's universities at the time. Since those two schools opened, only two more have opened, with another opening this fall. In that time the population of the city grew by a half-million. High Schools are not cheap - they require a lot of land, technical engineering, and investments in technology, not to mention upkeep. So we just didn't bother. When one friend ran in the provincial election in Northwest Calgary, we discovered his constituency - a very new one - had only six schools for a population of 55,000, equal to the population of Medicine Hat. Promises made for schools in the early 1990s were simply never honoured. All over Calgary, and I would imagine, Alberta, there were hundreds of fields in residential neighbourhoods that were meant to house schools. Those schools never came, at least until the NDP were elected. The irony was delicious when one PC MLA was quoted in April 2015 talking about how ridiculous it was that his daughter's kindergarten class had 30 pupils. If only there was something he could have done about it.
Ralph Klein famously had blown up half the hospitals in Calgary during the 1990s. The situation in Edmonton was no better. Again - with a booming population, but also with a population with some abnormally high levels of obesity and drug use, among other ailments. There was a persistent shortage of doctors and nurses, and I'm sure many people remember the difficulty in finding a family doctor ten years ago. Health Care services were increasingly privatised - which served to drive up health care costs, in all areas studied, while the cost of dentistry skyrocketed relative to neighbouring provinces.
Infrastructure was - and remains - far behind the needs of the province. With support from the Federal government, the LRTs in Calgary and Edmonton were expanded. Consider the case of the ring road in Calgary - its development has literally taken half a century. Some progress was made - we no longer have "highways of death" south of Calgary and from Edmonton to Fort McMurray; but much of Calgary remains in gridlock due to a combination of poor planning, poor development, and a historical lack of leadership.
The PC government of Alberta was caught in a bind. They had paid off the province's debt - but had lowered taxes too much. When oil royalties started drying up in the mid-2000s, thanks to the transition from "conventional" to "unconventional" oil, the government preferred to do nothing than either raise taxes or debt finance - such was the power of Alberta's low tax, no debt myth. Well, that myth has cost us. Jim Prentice at least had some bravery to confront the power of that myth and accept reality, but his steps were too few, too short, and too late. He did acknowledge something else though: the downturn had brought with it decreased cost of business and lower interest rates. Government spending had not been so cheap in years.
We now have a government willing to raise revenue and use debt finance, and they are doing it. There is much dismay about the size of the deficit - but all people can criticize is the amount civil servants get paid. Apparently, the government isn't blowing this money on unnecessary crap - I am sure we would know about it by now. They are doing what had to be done ten and twenty years ago, today. Perhaps we should be thankful.
Thanks for reading.
Monday, 8 August 2016
The Perfect Storm, part 4: Good News for Once
Well, Alberta certainly is in a pickle. Without massive resource revenues to finance the province's "rich government" the whole system was set to collapse like Russia's odds in the Paralympics. Tens of thousands were laid off; thousands moved away, and the province elected to government the party that promised to raise taxes the most. I call it making the best of a bad situation.
You'll be forgiven to think that it's only been bad news since then. Alberta's news company has certainly done its best to make it seem like the NDP have been doing nothing but screw up for a year and a half, but that simply isn't so. So, it's time to look at where we are, and more than that, identify the things that should give us hope. So together, let us stop bellyaching and whining, and realize that good things are indeed just around the corner, so long as we don't scare them off.
First of all, we need address the dreaded T: taxes. Are they so high they are crushing business? Are they so high they are crushing entrepreneurship? Are they so high they are hurting the people of Alberta? We must be honest and conclude, no, they most certainly are not. Dealing with these questions in reverse order, we must first concede that income taxes were raised solely on the province's very wealthy, otherwise known as people who can afford to pay it. The people who lost their jobs, or just their overtime, will see no increase in their taxes - which would not have been the case if a PST was initiated. Therefore, there is no more suffering for them. Indeed, the government's defence of its civil service has probably helped people more than a tax cut would. Just consider the refugees from Fort McMurray, who received aid from the province as fast as could be, including in the guise of schools for their children. Are the new taxes stifling entrepreneurship? I'm sure we all see new businesses in our neighbourhoods; at least I do. And lastly, slightly increasing corporate tax rates (which apply to profits alone) can literally in no way drive a company unprofitable. That is just not how corporate taxes work. So, we can conclude that the NDP has in fact done more to fight the deficit, and act responsibly, than any of its opposition parties offered or seem willing to do.
So, having dispelled the boogeyman of taxes away, we need to consider just all the advantages Alberta still has. Yes, oil is gone; if it comes back at all, it's return will likely to be brief, so let's move on in life. Free money is over, but we have a lot more to offer than no taxes, no oversight, and no regulations.
Probably the most important thing going on in Canada right now is not the fall in oil, but a massive housing bubble. While it affected Alberta greatly, it has reached truly lunatic proportions in Canada's first and third cities, Toronto and Vancouver. Why is this a good thing? Well, it isn't ,but it is an opportunity for Alberta. Simply put, people are losing the ability to live and work in those cities. Businesses are becoming restricted in their pools of talent as fewer and fewer people can get by in such crazy environments. We also have something that few cities in the world have: skylines filling up with empty buildings. With corporate leases reaching lows not seen since the 1980s, Alberta is rapidly assembling all the factors a business could possibly need to thrive into the future. Consider: our taxes are lower than BC's or Ontario's, largely thanks to the absence of a PST. Our electricity rates are among the lowest in the country, thanks to the collapse of fossil fuel prices. Our corporate real estate is practically free, and we have a relatively low cost of living and a well-educated, hard working population.
The only thing that could work against this favourable situation is the outrageously crazy criticism of the government. Criticism of a government is always necessary, but in Alberta it has truly reached new lows. My only fear is that our outspoken neighbours, the haters, will terrify potential businesses, either from their bad behaviour or their bad mouths. Luckily, things are just as bad in Ontario for the Wynne government, if not worse; so maybe we will dodge the bullets we fire at ourselves.
But last month De Beers relocated it's head office from Toronto to Calgary. Will they be the last? I highly doubt it. Alberta is simply too good to be true. I anticipate we will be seeing more and more companies relocate from Toronto to Calgary and Edmonton as business environment for employers and employees continues to erode there. Our skyline will fill up with the offices of Canada's biggest corporations, our economy will diversify, and people will be happier and more hopeful from it. We just have to get through this. We can do it!
You'll be forgiven to think that it's only been bad news since then. Alberta's news company has certainly done its best to make it seem like the NDP have been doing nothing but screw up for a year and a half, but that simply isn't so. So, it's time to look at where we are, and more than that, identify the things that should give us hope. So together, let us stop bellyaching and whining, and realize that good things are indeed just around the corner, so long as we don't scare them off.
First of all, we need address the dreaded T: taxes. Are they so high they are crushing business? Are they so high they are crushing entrepreneurship? Are they so high they are hurting the people of Alberta? We must be honest and conclude, no, they most certainly are not. Dealing with these questions in reverse order, we must first concede that income taxes were raised solely on the province's very wealthy, otherwise known as people who can afford to pay it. The people who lost their jobs, or just their overtime, will see no increase in their taxes - which would not have been the case if a PST was initiated. Therefore, there is no more suffering for them. Indeed, the government's defence of its civil service has probably helped people more than a tax cut would. Just consider the refugees from Fort McMurray, who received aid from the province as fast as could be, including in the guise of schools for their children. Are the new taxes stifling entrepreneurship? I'm sure we all see new businesses in our neighbourhoods; at least I do. And lastly, slightly increasing corporate tax rates (which apply to profits alone) can literally in no way drive a company unprofitable. That is just not how corporate taxes work. So, we can conclude that the NDP has in fact done more to fight the deficit, and act responsibly, than any of its opposition parties offered or seem willing to do.
So, having dispelled the boogeyman of taxes away, we need to consider just all the advantages Alberta still has. Yes, oil is gone; if it comes back at all, it's return will likely to be brief, so let's move on in life. Free money is over, but we have a lot more to offer than no taxes, no oversight, and no regulations.
Probably the most important thing going on in Canada right now is not the fall in oil, but a massive housing bubble. While it affected Alberta greatly, it has reached truly lunatic proportions in Canada's first and third cities, Toronto and Vancouver. Why is this a good thing? Well, it isn't ,but it is an opportunity for Alberta. Simply put, people are losing the ability to live and work in those cities. Businesses are becoming restricted in their pools of talent as fewer and fewer people can get by in such crazy environments. We also have something that few cities in the world have: skylines filling up with empty buildings. With corporate leases reaching lows not seen since the 1980s, Alberta is rapidly assembling all the factors a business could possibly need to thrive into the future. Consider: our taxes are lower than BC's or Ontario's, largely thanks to the absence of a PST. Our electricity rates are among the lowest in the country, thanks to the collapse of fossil fuel prices. Our corporate real estate is practically free, and we have a relatively low cost of living and a well-educated, hard working population.
The only thing that could work against this favourable situation is the outrageously crazy criticism of the government. Criticism of a government is always necessary, but in Alberta it has truly reached new lows. My only fear is that our outspoken neighbours, the haters, will terrify potential businesses, either from their bad behaviour or their bad mouths. Luckily, things are just as bad in Ontario for the Wynne government, if not worse; so maybe we will dodge the bullets we fire at ourselves.
But last month De Beers relocated it's head office from Toronto to Calgary. Will they be the last? I highly doubt it. Alberta is simply too good to be true. I anticipate we will be seeing more and more companies relocate from Toronto to Calgary and Edmonton as business environment for employers and employees continues to erode there. Our skyline will fill up with the offices of Canada's biggest corporations, our economy will diversify, and people will be happier and more hopeful from it. We just have to get through this. We can do it!
Saturday, 30 July 2016
Alberta's Perfect Storm, Part 2
Last time I looked at some of the ways Alberta's economic pillar, the fossil fuel industry, was recently affected negatively by a combination of technological change, competition and strategic interference. However, to understand the present economic bust more fully, we need consider more than the industrial side of things, but the human side, too. Unfortunately, much of the province's suffering today is result of poor choices made by people in government, and in their private lives, as it is a matter of circumstance. Accordingly, I believe much of what has happened was avoidable, as our predicament was predictable, but our leaders, and our selves, failed us.
To be gentle, we should start by considering the failings of the PC government.
The most common complaint about the past government is that they failed to plan for the future. This is a big charge, made up of two major components. The first is that they failed to save for days like this. Another component is that they failed to diversify the economy.
On the first charge, that they failed to save, rings all too true. The PCs, from Klein to Redford will forever be condemned as both reckless and irresponsible. The Province's Heritage fund was left to stagnate, left undisturbed since the downturn of the 1980s. Since that downturn, Alberta had paid off its debt, and was in the position, I remember, "to pay off the debt of other provinces, so long as they promised never to go into debt again" (this was actually argued in the National Post over a decade ago). Instead, the government cut taxes on the rich, on corporations, and on royalties.
That the tax cuts favoured the rich is undeniable; a flat tax, set at the relatively high rate of 10%, were you poor, or the incredibly low rate of 10%, were you rich, was a massive giveaway of billions of dollars a year in revenue. It needs be remembered, for all time, that tax cuts for the rich were very much in vogue in the English speaking world of the early 2000s, but that just serves to reinforce how shortsighted these governments were globally. Now tax cuts in general are not necessarily bad things; I would argue though that you can't afford them when people are dying in your hospital waiting rooms, and the insane are being put out on the streets. The only thing that made these tax cuts doable were the high revenues the province received from natural gas, gambling, and oil, the complicity of the province's media, and the wishes of the voters, in that order.
Cutting taxes on corporations remains popular today; probably because all of our news media comes from blatantly self-interested media corporations. However, even I feel that this may have been a good idea at the time. Low taxes do attract new businesses; but it can be seen that this did not happen in Alberta for other reasons, which I will explore later. The companies we did have, those incredibly profitable corporations of Alberta, were able to save their profits, and if you look who owns what, remove them from the country altogether.
The cut in the rate of oil royalties was actually more of an accident than a deliberate giveaway. Still, the story that can be told tells the same story of moral cowardice as before. Royalties dropped because Alberta had two different kinds of royalties: one for conventional oil, and one for the oil sands. Like the rest of Earth, Alberta's conventional oil was cheap to access and of good quality. Accordingly, the government in the distant past effected a decent royalty rate. Cheap access and good quality are two characteristics lacking in the oil sands. The Oil Sands are so inaccessible that for many years the best plan for getting at the stuff was by nuking the ground around Fort McMurray, a plan approved by Premier Manning's government (more amazingly, the Soviet Union actually did this on its own soil). As for quality, the oil sands are so bad they require much refining before even becoming as good as conventional oil; hence the much lower price it fetches internationally. So, to encourage development of the oil sands, the government set royalty rates low, and provided further generous incentives to oil sands companies. The drop in oil royalties basically reflects the historical depletion of Alberta's conventional oil sources, and their replacement by the oil sands.
Now the moral cowardice. Premier Stelmach inherited the government around the time the oil sands displaced the conventional sources as Alberta's economic (and revenue) driver. He proposed a royalty review meant to address the discrepancy between the oil royalties. In those days the price of oil was galloping towards $150US a barrel, and if your Calgary based oil company wasn't insanely profitable, there was something terribly wrong with it, or more likely, you. Nonetheless, the royalty review was aborted, with the specious claim the royalties were fine. The only thing to come from the whole situation was that Alberta's oil companies threw their financial weight behind the offshot of the wilting Social Credit Party: the Wildrose Alliance.
During the Stelmach years, investment poured into the Alberta Oil Sands. The Province's economic growth and population growth were simply stunning. Already, though, problems were becoming apparent. Things were simply too good. The low tax regime adopted by the province undoubtedly encouraged the mass migration and investment we received (reducing regulations also helped, no doubt). It also encouraged massive inflation; at one time, the poverty line in Fort McMurray was an income of over $60,000 a year.
The government lacked the resources to keep up with the growth. Whole neighbourhoods were being built with no schools, community centres, parks. Calgary didn't get a new high school for 15 years, while the population increased by the hundreds of thousands. During the last election, one friend ran in a Northwest Calgary riding. I was astonished that it had as many schools - six - as the 60 year old community I reside in. There was a lack of hospitals, schools, teachers, doctors, nurses - there was a shortage of almost everything necessary for society to run.
There is perhaps a development lesson here. I feel the lesson is don't encourage more development than you can pay for or keep up with. The Alberta governments reckless tax cuts blew up a bubble economy, while reducing its ability to keep pace with it. And all the while, they didn't save a dime. Former Premier Lougheed criticized the government for its haphazard economic development. One think tank went so far as deem Alberta the province with the worst fiscal outlook in the country.
Why did economic diversification fail? Deregulating the electricity markets didn't help. Experts say it has cost the province's people and businesses $20 billion since it was implemented. This alone may not have been fatal to Alberta's other industries, but the massive economic growth in the province drove up rents and leases, too. The last nail in the coffin of Alberta's economic diversification was the success of the Oil Sands itself. One could simply make so much money, so fast, regardless of your passions or qualifications, that almost all the province's energies and talents were sucked into the oil sector. This was not a bad thing at the time, but were something to happen to oil, we would definitely be in an uncomfortable position.
And here we are.
I realize I have spent too long bashing the government. The people of Alberta deserve a shake too. Next time.
Again, thanks for reading.
To be gentle, we should start by considering the failings of the PC government.
The most common complaint about the past government is that they failed to plan for the future. This is a big charge, made up of two major components. The first is that they failed to save for days like this. Another component is that they failed to diversify the economy.
On the first charge, that they failed to save, rings all too true. The PCs, from Klein to Redford will forever be condemned as both reckless and irresponsible. The Province's Heritage fund was left to stagnate, left undisturbed since the downturn of the 1980s. Since that downturn, Alberta had paid off its debt, and was in the position, I remember, "to pay off the debt of other provinces, so long as they promised never to go into debt again" (this was actually argued in the National Post over a decade ago). Instead, the government cut taxes on the rich, on corporations, and on royalties.
That the tax cuts favoured the rich is undeniable; a flat tax, set at the relatively high rate of 10%, were you poor, or the incredibly low rate of 10%, were you rich, was a massive giveaway of billions of dollars a year in revenue. It needs be remembered, for all time, that tax cuts for the rich were very much in vogue in the English speaking world of the early 2000s, but that just serves to reinforce how shortsighted these governments were globally. Now tax cuts in general are not necessarily bad things; I would argue though that you can't afford them when people are dying in your hospital waiting rooms, and the insane are being put out on the streets. The only thing that made these tax cuts doable were the high revenues the province received from natural gas, gambling, and oil, the complicity of the province's media, and the wishes of the voters, in that order.
Cutting taxes on corporations remains popular today; probably because all of our news media comes from blatantly self-interested media corporations. However, even I feel that this may have been a good idea at the time. Low taxes do attract new businesses; but it can be seen that this did not happen in Alberta for other reasons, which I will explore later. The companies we did have, those incredibly profitable corporations of Alberta, were able to save their profits, and if you look who owns what, remove them from the country altogether.
The cut in the rate of oil royalties was actually more of an accident than a deliberate giveaway. Still, the story that can be told tells the same story of moral cowardice as before. Royalties dropped because Alberta had two different kinds of royalties: one for conventional oil, and one for the oil sands. Like the rest of Earth, Alberta's conventional oil was cheap to access and of good quality. Accordingly, the government in the distant past effected a decent royalty rate. Cheap access and good quality are two characteristics lacking in the oil sands. The Oil Sands are so inaccessible that for many years the best plan for getting at the stuff was by nuking the ground around Fort McMurray, a plan approved by Premier Manning's government (more amazingly, the Soviet Union actually did this on its own soil). As for quality, the oil sands are so bad they require much refining before even becoming as good as conventional oil; hence the much lower price it fetches internationally. So, to encourage development of the oil sands, the government set royalty rates low, and provided further generous incentives to oil sands companies. The drop in oil royalties basically reflects the historical depletion of Alberta's conventional oil sources, and their replacement by the oil sands.
Now the moral cowardice. Premier Stelmach inherited the government around the time the oil sands displaced the conventional sources as Alberta's economic (and revenue) driver. He proposed a royalty review meant to address the discrepancy between the oil royalties. In those days the price of oil was galloping towards $150US a barrel, and if your Calgary based oil company wasn't insanely profitable, there was something terribly wrong with it, or more likely, you. Nonetheless, the royalty review was aborted, with the specious claim the royalties were fine. The only thing to come from the whole situation was that Alberta's oil companies threw their financial weight behind the offshot of the wilting Social Credit Party: the Wildrose Alliance.
During the Stelmach years, investment poured into the Alberta Oil Sands. The Province's economic growth and population growth were simply stunning. Already, though, problems were becoming apparent. Things were simply too good. The low tax regime adopted by the province undoubtedly encouraged the mass migration and investment we received (reducing regulations also helped, no doubt). It also encouraged massive inflation; at one time, the poverty line in Fort McMurray was an income of over $60,000 a year.
The government lacked the resources to keep up with the growth. Whole neighbourhoods were being built with no schools, community centres, parks. Calgary didn't get a new high school for 15 years, while the population increased by the hundreds of thousands. During the last election, one friend ran in a Northwest Calgary riding. I was astonished that it had as many schools - six - as the 60 year old community I reside in. There was a lack of hospitals, schools, teachers, doctors, nurses - there was a shortage of almost everything necessary for society to run.
There is perhaps a development lesson here. I feel the lesson is don't encourage more development than you can pay for or keep up with. The Alberta governments reckless tax cuts blew up a bubble economy, while reducing its ability to keep pace with it. And all the while, they didn't save a dime. Former Premier Lougheed criticized the government for its haphazard economic development. One think tank went so far as deem Alberta the province with the worst fiscal outlook in the country.
Why did economic diversification fail? Deregulating the electricity markets didn't help. Experts say it has cost the province's people and businesses $20 billion since it was implemented. This alone may not have been fatal to Alberta's other industries, but the massive economic growth in the province drove up rents and leases, too. The last nail in the coffin of Alberta's economic diversification was the success of the Oil Sands itself. One could simply make so much money, so fast, regardless of your passions or qualifications, that almost all the province's energies and talents were sucked into the oil sector. This was not a bad thing at the time, but were something to happen to oil, we would definitely be in an uncomfortable position.
And here we are.
I realize I have spent too long bashing the government. The people of Alberta deserve a shake too. Next time.
Again, thanks for reading.
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