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Alberta Budget Final

Alberta Budget Final

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Published by: SchoolofPublicPolicy on Jan 24, 2013
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02/05/2013

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www.policyschool.ca
Volume 6
Issue 2
January 2013
A PRIMER ON THE GOVERNMENTOF ALBERTA’S BUDGET
Ron Kneebone
The School of Public Policy, University of Calgary 
SUMMARY
Provincial budgets may normally make for dry reading, but in Alberta’s case, there is plenty of suspense lurking inside the pages — and that’s not necessarily a good thing. Your average family may know certain things about balancing a budget: keeping spending roughly in line with income; not relying on volatile, unpredictable income streams to coverexpenses; and not leaving the kids with an inheritance of significant debt. But look at howAlberta has been managing its budget in the last decade, and it is obvious that the provincialgovernment is breaking a lot of the financial management rules that most Albertans aredisciplined enough to live by at home.A clear way to get a sense of how the Alberta government has managed its finances is byanalyzing how much provincial program spending relies on depleting provincial savings, either inthe form of savings funds or non-renewable resource deposits, such as oil and gas. By 2011,Alberta’s “Budget Gap” had grown to almost the same level it was in 1993, when the provincewas forced to adopt wrenching budget cuts in order to close what had become a yawning gapbetween revenue and costs amounting to $4,000 in spending for every man, woman and childin the province.This paper suggests there are three key questions that should be posed to our government andto any political party seeking to represent our interests as our government:1.How tolerant are they of annual deficits? Do they advocate a strategy of relatively lower levelsof government spending and/or higher tax rates, so as to avoid deficits no matter the stateof the economy? Or will they tolerate deficits during economic slowdowns to enable higherlevels of spending and/or lower tax rates?2.To what extent are they willing to trust the payment of health-care costs and the costs of education and social assistance to oil and gas royalties as opposed to taxation?3.How, exactly, does one define investments in social infrastructure; investments that can befunded by borrowing or by spending non-renewable resource royalties? What limits should beput on borrowing to fund such expenditures?
The author wishes to acknowledge the helpful comments of the anonymous referees.
 
INTRODUCTION
Government budgets rarely threaten to push the publications of Stephen King or J.K. Rowlingoff the bestseller list. That is because, to most people, budgets are as dry as dust. That’sunfortunate because government budgets are wonderfully informative. They report on pastsuccesses and failures of government policy and they document our hopes and aspirations asthey are understood by the people we elect to represent our interests. Government budgets tellus where we have been and where we are heading. They hint at what our taxes might look likein the future and how public services — from health to education to social assistance — mightevolve over time. Government budgets are important for voters to understand, but few voters do.While economists don’t mind reading what others consider to be dry as dust — which is fairsince economists write much of it — almost everyone else finds trying to understandgovernment budgets enough of a challenge that they do not even bother to try. Yet for thedemocratic process to work effectively, it is important that governments make what is in theirbudgets easy to understand so that voters can make informed choices. Unfortunately, the needfor governments to respect accounting conventions makes it difficult for taxpayers — those whomust ultimately pay the government’s bills — to wade their way through balance sheets,reconciliation statements and budgetary addenda. What is needed is someone to translate whatis said in the budget into a simple-to-understand description. That’s the purpose of this note.In what follows, I will describe, as simply and as fairly as I can, the direction in which the mostrecent budget of the Government of Alberta — released February 9, 2012 — suggests ourgovernment’s finances are moving. A lot of niggling details will be swept under the carpetbecause I will be painting a picture using broad strokes. But that’s okay, because the details areless important than a broad understanding of where the budget suggests we have been and wherewe are heading.
THE BIG PICTURE
All governments face a budget constraint in relating spending to revenue. Let’s start byseparating
Total Spending
and
Total Revenue
into the smaller components that comprise them. I’llstart with Total Revenue.Provincial governments have a number of sources of revenue, the most important of which istaxation. There are, of course, many forms of taxation. Provincial governments tax the incomesof individuals and corporations; they impose so-called “sin taxes” on our purchases of alcoholand tobacco; they tax us when we buy gasoline; they tax us on the value of property we own;and they tax us because we try to earn a living (payroll taxes). Other provincial governments,though not Alberta’s, impose a tax equal to a percentage of most things we buy (a sales tax).Rather than delve into these details we will just refer to all such forms of revenue as
Taxation
.The federal government imposes its own array of taxes on all Canadians and then transfers someof that revenue to provincial governments. These intergovernmental transfers arrive in a varietyof forms. There are transfers tied to specific programs and transfers that the provincialgovernment can use more or less as they please. Again, these details need not concern us and sowe will refer to all such transfers from the federal government as
Federal Transfers
.
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Provincial governments also receive revenue in the form of the income they earn on thefinancial assets they own. The government of Alberta holds the financial assets it owns in anumber of savings funds. The most notable of these are the Heritage Fund, designed to act as asavings fund for the benefit of future generations, and the Sustainability Fund, intended to actas a kind of rainy day fund to absorb the budgetary consequences of unexpected events. Thelist also includes endowment funds intended to produce a stream of investment income to beused to fund medical research and research in science and engineering. I’ll refer to all thesesources of revenue as
Investment Income
.Many provinces enjoy still another source of revenue; revenue realized as the result of theproduction and sale of non-renewable resources. The name given to these revenues — non-renewable resource revenues — accurately describes what these revenues represent; therevenue gained from the sale of natural resources that are in finite (non-renewable) supply. Thegovernment of Alberta enjoys the benefit of receiving a large amount of revenue from thissource. It comes in the form of royalties (a form of tax) that the government imposes on theproduction of natural gas, crude oil, bitumen, and coal, and in the form of land sales and leases.I will refer to all of these sources of revenue as
non-renewable resource revenue
or
NRR
for short.A provincial government’s Total Revenue, then, can be summarized as being the sum of all of the items described above. That is:
 Total Revenue = Taxation + Federal Transfers + Investment Income + NRR
Now let’s turn to Total Spending. This is much easier as there are only two broad categories of spending that provinces do. Most of the spending that governments do is called
ProgramSpending
. This is what the government spends on goods and services and what it transfers topeople and to other levels of government. The “Big Three” areas of spending for anyprovincial government are health, education and social services, in that order. The other part of Total Spending will be discussed below. This is the cost of paying interest on borrowed funds,what we call
Debt Service
. Total Spending, then, is given by:
 Total Spending = Program Spending + Debt Service.
For reasons we discuss below it is difficult for governments to always equate Total Revenue toTotal Spending. If Total Spending exceeds Total Revenue, the imbalance is referred to as a
Deficit
. In this case the government can fund the difference between spending and revenue byborrowing or by selling financial assets. When they borrow, governments sell government-issued bonds to us. When they raise revenue in this fashion they must, of course, pay usinterest on the amount they borrow. This payment of interest, what is called Debt Service,appeared above in our description of Total Spending. The other thing governments can dowhen they find their revenues are insufficient to pay for their spending is to sell some of theirfinancial assets. The government of Alberta has been doing a lot of this lately by selling thefinancial assets it holds in its Sustainability Fund, something we will talk more about later.When a government sells financial assets, it of course reduces the amount of InvestmentIncome it receives.
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