My thoughts on the 2015 Alberta Budget

I had a number of deep conversations and debates about the new Alberta budget. I’ve consolidated and structured those conversations here.

The reality is that no one likes the new budget, the left or the right. That tells me they probably got it right.

CURRENT STATE OF THE ECONOMY

The current situation is different than any we’ve seen since 1970. The current oil price correction is based on supply vs. demand. At current, global oil supply is higher than global oil demand. Most people are trained to blame OPEC for supply shocks to the market but the reality is that the USA’s oil production has spiked and is at the highest it has ever been by significant factors.

I made a CPI and consumption corrected model of the EIA’s historical data and the oil price (WTI not WCS) that I can see us reaching is $25ish per barrel (approx $20 below where we are today). One of our major problems is that the Alberta oil is a blend of traditional and “oil sands”. Oil sands oil is extremely expensive to extract and process in comparison to traditional.

Will oil prices bounce back? Yes, but remember that this a supply shock. A supply shock where traditional oil is cheaper to produce. Oil prices will correct back when, and only when, demand increases (bad for the environment) or supply decreases (bad for the economy).

Demand is only likely to remain stable or decrease so the only correction will come from decreased supply… Supply decreases when we stop extracting and processing oil. As it costs more for us to extract and process our oil, we will feel the impact of this reduction before many others. Sadly, oil is a significant chunk our economy and this slowdown in supply will fall on the shoulders of every Albertan through reduced spending, increased unemployment and a lower tax base. The current situation is far different than any we have seen in the past few decades.

ON CORPORATE TAX

Corporate tax revenue is surely to take a steep decline in the short term for a number of sectors of the economy. Employment is the key to avoiding a recession and keeping liquidity in the market. Ensuring already suffering corporations don’t have any more reasons for mass layoffs is a two fold approach to ensuring higher revenues from income taxes and keeping sentiment positive (the real challenge). Do I think this is a smart move? Yes. To properly balance the operational budget would have surely sent the province into a recession and all ministries would require much larger cuts than they received. I can see an increase in corp taxes coming in the future but these economic conditions are not the ones to do it in.

Also, most of the time corporate profit ends up taxed at almost the exact rate as income anyway by the time it reaches the consumer market. Moving profit from the company to an individual requires both the company to pay its taxes on the profit (10% prov. and 15% fed) and then the receiver of the dividend must pay tax on the amount they receive from the dividend (calculated in a fancy way found here: http://turbotax.intuit.ca/tax-resources/tax-investment/federal-dividend-tax-credit-in-canada.jsp). That means that by the time anyone has personally realized the profits of a corporation, the money they receive has a tax rate of around the standard income tax rate. This is why corporations often choose to reinvest profits into growth which creates more employment and therefore more income tax revenue.

ON IMPLEMENTING A PST

The sad thing about sales taxes are that they are another form of regressive flat taxation that hits the vulnerable and low income populations harder than high income earners. There are many other progressive forms of taxation worth considering before a sales tax.

Others state that tax credits and exclusions can be implemented to level the regressive nature of a flat tax. This tax credits often come into consideration during tax season and apply to the previous year. Cashflow management is a key consideration for low income and vulnerable populations.

The benefit of a sales tax is that it is paid by visitors to the province from their earnings from outside the province. There is definitely a value to this but not one I have a huge opinion on presently.

ON PUBLIC vs PRIVATE SECTOR

Think of the government as the keeper of the economy that has to look out for everyones interests. The reality is that the government policy affects both public and private interests. Both parties influence policy and that is a good thing. Private enterprise comprises 80% of employment in Alberta and the Public sector the other 20%.

Please consider that almost all of the economic risk in society is held in the private sector. A sector that is teetering close to the brink of recession. Please also consider that all the risk in the public sector is tied to the performance of the private sector. Our unemployment rate in Alberta is very steeply growing on the “backs” of private sector employees (tens of thousands vs zero public job losses). When you look at the economic context as a whole, the small thing of not raising corporate taxes is insignificant when compared to what could happen if things slip further. Consider that the U.S. Treasury (and now the EU Central Bank) was forced to artificially support the economy to the tune of $85billion per month to prevent the possible repeat of the Great Depression. This has since tapered and ceased and most is well in the US economy. In potential times of great economic downturn, holding off a .5 or 1% increase in corporate taxes is nothing compared to the worst case scenario.

ON PUBLIC SECTOR CUTS/HOLDS

We live in a world of compromises. If we lived in a world of bests, we would have nothing. It’s a sad reality but a by-product of the markets and systems we have chosen as people to live in. Everyone would love (even the PCs) for there to be more hospitals, more teachers and schools, better senior care, better everything but the reality is that things cost money. If I was a public sector worker, I’d be happy with this budget as it could have been much worse.

ON THE SPEED OF CHANGE

Operationally, the Province of Alberta needs to balance its budget and reduce its dependency on oil revenues to protect our future. The financial and economic worlds react emotionally and swiftly based on sentiment. A radical shift in the economic structure of Alberta would lead to very emotional decisions and a what I suspect would be a large shift in sentiment. I’m happy to see the Government of Alberta taking a slow and controlled approach to balancing the budget as it should prevent wild swings in our economy.

ON THE HEALTHCARE LEVY

There has been lots of discussion about how the Healthcare levy will go into general revenues instead of specifically directed to the Healthcare budget. The healthcare budget is a larger amount than the sum of all income taxes (personal and corporate). Having these funds enter general revenue doesn’t concern me as the budget is so massive that the levy dollars will undoubtedly be used for health through direct funding or reducing funding from other revenues.

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