No sales tax for Alberta in latest budget
Alberta’s economic strategy of keeping taxes low, cutting spending and making targeted capital investments has received mixed reviews from observers since the United Conservative Party tabled its 2021 provincial budget last week.
The government laid out a plan to use deficit spending to continue bridging Alberta through the pandemic, while relying on higher oil prices to power a broader recovery.
“I don’t think that’s a bad bet,” said Stephen Murphy, executive vice-president of banking with Canadian Western Bank in Edmonton. “We continue to be in significant disruption, [but] there is a lot of pent-up economic capacity here and we see a lot of cash on the sidelines.”
But Chetan Dave, assistant professor in economics with the University of Alberta in Edmonton, suggested the budget simply kicked the can down the road.
“It’s not clear whether global oil demand is really going to come back to levels it reached before [the pandemic],” Dave said. “You could perfectly understand if people are using this slowdown — this lockdown time if you will — to switch away from oil as far as it’s possible.”
Hit by the twin shocks of Covid-19 and a collapse in energy prices, Alberta’s economy contracted 7.8% in real GDP terms last year, according to the government’s projections. The drop in oil revenue and increased pandemic-related spending resulted in the government posting an estimated $20.2 billion budget deficit for 2020-21. The government projected the deficit would then fall annually, reaching $8.0 billion in 2023-24.
With oil trading above US$60 a barrel in early March, the government projected real GDP growth of 4.8% in 2021-22, followed by growth ranging from 3.1% to 3.7% over the following three years based on oil price assumptions ranging from US$48 to US$56.50.
A report from credit rating agency DBRS Morningstar, published following the release of the budget, called the government’s oil price assumptions “conservative,” but suggested the “economic recovery may be slower than anticipated and remains dependent on several variables beyond control of the province,” including political and regulatory issues and “ongoing challenges to pipelines.”
In the budget, the government outlined a plan to lower per-capita spending to align with other provinces by freezing operating costs; directing $20.7 billion of capital expenditures over three years into areas such as healthcare, education and transportation infrastructure; and keeping Alberta’s low-tax regime in place to attract business investment.
The government also expressly deferred discussion of any change to the province’s revenue structure.
“Raising taxes at the best of times impedes economic growth,” said Travis Toews, Alberta’s Minister of Finance, in the budget speech. “And with the challenges we face today, it would undermine the economic recovery that is so essential.”
Alberta lowered its general corporate tax rate to 8%, from 10%, in July 2020, accelerating a move that had been previously scheduled for January 2022.
Dave said he also favours keeping corporate and personal income tax rates low to spur economic growth. However, Dave said the province is making a mistake in deferring consideration of a sales tax: “[The budget] was an opportunity to not just lower business taxes, but to lower personal income taxes, and put in a provincial sales tax that could be phased in.”
A sales tax would allow Alberta — the only province without one — to address the deficit without having to rely on an energy sector-based recovery or making painful spending cuts, he suggested.
“Once this pandemic is over, you want to diversify [the economy] and grow the province by engaging in human capital investments alongside physical capital investments,” Dave said. “I didn’t really see anything like that [in the budget].”
However, Alberta’s lack of a sales tax is still an “enormous” advantage for the province, Murphy suggested: “There’s zero political will in the province to be the government that actually made a move on the sales tax.”
Alberta’s relatively low net debt-to-GDP ratio compared to other big provinces gives it flexibility, Murphy added. Alberta is projected to post a net debt-to-GDP ratio of 24.5% in 2020-21, while Ontario and Quebec are projected to post ratios well above 40%.
In the budget, the Alberta government said it was committed to keeping net debt-to-GDP under 30% as a fiscal anchor.
Murphy said the province would benefit if Ottawa goes ahead with infrastructure initiatives to support renewable energy or carbon reduction investments in technology: “There is a major opportunity for Alberta to get a disproportionate share of those investments.”
In the meantime, Alberta’s business sector has shown resilience in adjusting to new economic realities while awaiting more certainty from government in terms of the lifting of lockdowns before deploying capital, Murphy suggested.
Contrary to what Bay Street may think, he added, “There are still a lot of healthy businesses [in Alberta].”