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A sobering new reality Alberta forced to rethink its age of ‘opportunity, stability, certainty ...’ Gary Park For Petroleum News In the wake of a stunning May 5 election result, Petroleum News’ Canadian correspondent Gary Park takes a look in a two-part series at how Alberta will adjust to a radical change in its resource-based economy and whether it can broaden that economic base. For more than a decade Albertans reveled in what former premier Ralph Klein labeled the Alberta Advantage.
Now, political, economic and business leaders from a wide spectrum are calling for a rebranding.
Feeding off a seemingly limitless flow of oil and natural gas revenues, which have covered as much as 40 percent of the province’s spending, Alberta was able during Klein’s term to introduce a flat income tax, eliminate health care premiums and occasionally put “prosperity bonus” checks in the mail to all Albertans.
As a result, Alberta became a magnet for other Canadians, along with a flood of immigrants, eager to participate in the province’s riches. They played the major role in pushing the population up by 500,000 from 2011 to its current 4.15 million.
But the Alberta Advantage has been described by Adam Legge, chief executive officer of the Calgary Chamber of Commerce, as a model that is no longer workable as non-renewable resource revenues have fallen to 17 percent of government income.
He said the Alberta Advantage was a “package of low taxes and fiscal responsibility that promised to yield a place of opportunity, stability, certainty and unbounded possibility. A place that people and business flocked to. Where imagination bred investment. Where ambition turned into accomplishment. Stability, prudence and certainty.
“Sadly, that Alberta Advantage is broken,” he wrote in a Calgary Herald opinion piece.
Alarm bells Over recent years, alarm bells have been issuing a warning that the cozy existence enjoyed by Albertans could no longer be sustained.
But successive governments paid little heed.
They continued with a dramatic expansion in the cost and size of their operations, with per capita spending on public services estimated at C$1,300 more than the national average.
They also resolutely held tight to a low tax regime - the overriding article of faith in the Alberta Advantage - by refusing to even countenance the thought of joining Canada’s other nine provinces and introducing a sales tax.
It took only a few months of the lowest oil prices in two decades and the shockwaves from thousands of job layoffs for the former government of Premier Jim Prentice to announce a 9 percent cut in program spending.
Flat tax dumped Next, the prized flat tax on income was unceremoniously dumped in the 2015-16 budget amid howls of outrage by even some veterans of former governments, but the Prentice administration, faced with a projected revenue shortfall of C$7 billion, said it needed to develop new sources of revenue to protect front-line services and end Alberta’s dependence on volatile energy royalties.
“Albertans want higher taxes at higher income levels,” former Finance Minister Robin Campbell said. “We’re asking those who can afford it (individuals with incomes over C$50,000) to pay a little bit more.”
The income tax change was accompanied by hikes in user fees and increases in liquor, tobacco and fuel taxes.
To those unhappy with the changes, Campbell said the government would have taken an even greater bite but for warnings from economists that the province could have been driven into a recession.
Janice Plumstead, senior economist with the independent Canada West Foundation, said a provincial sales tax would likely have been the best choice, although that would have been political suicide in Alberta.
She credited the government with being “very thoughtful ... and doing a good job of making tax changes that will not hurt the economy.”
Campbell said that “right now the competitive advantage we have over the rest of Canada is very slim. As we look to diversifying our economy, especially from petrochemicals, we’re competing not just with other provinces but with the southern (U.S.) states. So it would not be prudent at this time to look at corporate taxes.”
Drop in oil royalties, corporate profits As it is, the drop in oil royalties to C$2.9 billion in the new fiscal year from C$8.8 billion in 2014-15, is being accompanied by a 50 percent drop in corporate profits.
For any Albertans who may think the worst is over, Campbell set them straight.
He said the government will “honor the current (labor) contracts that are now in place. But as they expire, new contracts will be negotiated.”
“Over the years, we have been complacent and have fallen back on the status-quo approach to funding public services without any effort to recover or mitigate costs,” he said.
But the realities of the government’s financial plight aside, Albertans were not in a mood to listen to the government.
They lashed back in the May 5 election, ending the Progressive Conservative dynasty just short of 44 years and making that party pay the price for scandals, its overwhelming sense of empowerment and its mismanaged election campaign.
Mandate to the left Even more stunningly, the voters gave a resounding mandate to the left-of-center New Democratic Party under Rachel Notley, a 51-year-old daughter of a former NDP leader and herself a one-time lawyer and labor negotiator.
The NDP, which had never done better than electing 16 legislators, sent 53 of its candidates to the provincial legislator, with the Conservatives left in ruins, claiming only 10 of the 87 seats.
The new government caucus includes only a handful of people with political experience at the municipal or provincial levels. Among the raw newcomers are several in their 20s, with one aged exactly 20.
Notley says Albertans will be able to look at her government and see themselves reflected.
But the euphoria of victory will be short-lived. The result doesn’t change the fiscal woes facing Alberta and could, unless the NDP administration moves carefully, drive investors away in droves.
The new government has indicated it might order an independent review of Alberta’s finances, which some fear could disclose that the Prentice administration was less than candid about the numbers.
Whatever emerges, the Alberta Advantage is likely not a label that will ever again be applied to the province.
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