From the Fraser Institute

According to the recent mid-year update tabled Thursday, the Smith government projects a $4.6 billion surplus in 2024/25, up from the $2.9 billion surplus projected just a few months ago. Despite the good news, Premier Smith must reduce spending to avoid budget deficits.

The fiscal update projects resource revenue of $20.3 billion in 2024/25. Today’s relatively high—but very volatile—resource revenue (including oil and gas royalties) is helping finance today’s spending and maintain a balanced budget. But it will not last forever.

For perspective, in just the last decade the Alberta government’s annual resource revenue has been as low as $2.8 billion (2015/16) and as high as $25.2 billion (2022/23).

And while the resource revenue rollercoaster is currently in Alberta’s favor, Finance Minister Nate Horner acknowledges that “risks are on the rise” as oil prices have dropped considerably and forecasters are projecting downward pressure on prices—all of which impacts resource revenue.

In fact, the government’s own estimates show a $1 change in oil prices results in an estimated $630 million revenue swing. So while the Smith government plans to maintain a surplus in 2024/25, a small change in oil prices could quickly plunge Alberta back into deficit. Premier Smith has warned that her government may fall into a budget deficit this fiscal year.

This should come as no surprise. Alberta’s been on the resource revenue rollercoaster for decades. Successive governments have increased spending during the good times of high resource revenue, but failed to rein in spending when resource revenues fell.

Previous research has shown that, in Alberta, a $1 increase in resource revenue is associated with an estimated 56-cent increase in program spending the following fiscal year (on a per-person, inflation-adjusted basis). However, a decline in resource revenue is not similarly associated with a reduction in program spending. This pattern has led to historically high levels of government spending—and budget deficits—even in more recent years.

Consider this: If this fiscal year the Smith government received an average level of resource revenue (based on levels over the last 10 years), it would receive approximately $13,000 per Albertan. Yet the government plans to spend nearly $15,000 per Albertan this fiscal year (after adjusting for inflation). That’s a huge gap of roughly $2,000—and it means the government is continuing to take big risks with the provincial budget.

Of course, if the government falls back into deficit there are implications for everyday Albertans.

When the government runs a deficit, it accumulates debt, which Albertans must pay to service. In 2024/25, the government’s debt interest payments will cost each Albertan nearly $650. That’s largely because, despite running surpluses over the last few years, Albertans are still paying for debt accumulated during the most recent string of deficits from 2008/09 to 2020/21 (excluding 2014/15), which only ended when the government enjoyed an unexpected windfall in resource revenue in 2021/22.

According to Thursday’s mid-year fiscal update, Alberta’s finances continue to be at risk. To avoid deficits, the Smith government should meaningfully reduce spending so that it’s aligned with more reliable, stable levels of revenue.

From the Fraser Institute

By Ben Eisen and Jake Fuss

Recently, Prime Minister Justin Trudeau announced several short-term initiatives related to tax policy. Most notably, the package includes a two-month GST holiday on certain items and a one-time $250 cheque that will be sent to all Canadians with incomes under $150,000.

Unfortunately, the Trudeau government’s package is a grab bag of bad ideas that will not do anything to get Canada out of the long-term growth rut in which our economy is mired. There are too many to list all in one place, but here are four of the biggest problems with Prime Minister Trudeau’s tax plan.

1. It reduces the wrong taxes. When it comes to economic growth, not all taxes are created equal. Some cause far more economic harm per dollar of government revenue raised than others. The government’s package creates a holiday on the GST for some items (only for two months) which is a mistake given that the GST is one of the least economically harmful components of the tax mix. Canada’s recent growth record is abysmal, and boosting growth should be a primary goal of any changes to tax policy. A GST cut of any duration fails this test relative to other tax cuts.
2. Temporary tax holidays shift consumption in time, they don’t boost growth. The government’s GST reduction is actually a short-term tax holiday on certain items that will last two months. There are decades worth of economic research showing that when governments create short-term tax breaks, they may change the timing of consumption, but they won’t contribute to actual economic growth. Shifting consumption from the future to the present won’t help get Canada out of the economic doldrums. This is particularly true of the Trudeau tax holiday since purchases that Canadians may have made after the two-month holiday period will simply be shifted forward to take advantage of the absence of the GST. As noted above, there are better taxes to cut than the GST, but no matter what taxes we are talking about permanent reductions are vastly superior to temporary tax cuts like short-term holidays.
3. One-time tax rebates don’t improve economic incentives. Perhaps the worst element of the Trudeau government’s announcement was a plan to send $250 cheques to all Canadians earning under $150,000. One-time tax rebates are a terrible way to provide tax relief. When you cut income tax rates, you improve incentives for people to work and invest because they get to keep a larger share of their earnings. This helps the economy grow. One-time rebates that you get regardless of the economic choices you make has no similar effect. This means that the rebate with its $4.7 billion price tag won’t help Canada’s poor growth performance.
4. It borrows from the future to give to the present. The federal government is currently running a large deficit. This raises the question of who will have to pay the $4.7 billion bill for the one-time payments announced today. The answer is that the government will have to borrow the money and therefore future taxpayers will have to either pay it off or service the extra debt indefinitely. The money the Trudeau government will send out won’t come out of thin air, it’ll have to be borrowed with the burden falling on future taxpayers.

The Trudeau government got one thing conceptually right, which is that there are advantages to reducing the tax burden on Canadians. Unfortunately, the policy package it has put forward to provide tax relief gets everything wrong. It reduces the wrong taxes, shifts taxes temporally rather than cutting them, does nothing to improve economic incentives, and burdens future taxpayers. With the holiday season around the corner, this attempt at a gift to Canadian taxpayers is the economic equivalent of a lump of coal in the stocking.