Prentice’s Path: Getty or Klein?

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Appeared in the Financial Post

Alberta Premier Jim Prentice is in the midst of formulating his first budget and the fiscal path of the province while watching oil prices continue to decline. In this environment, the key question for the new premier is: will he follow the lead of former Premier Don Getty—and raise taxes as both the premier and finance minister are hinting—or Ralph Klein, who controlled spending and reduced taxes? The answer will affect the fortunes of all Albertans.

When Ralph Klein won the leadership of the Conservatives in 1992, he inherited a deficit of $3.3 billion (almost one-quarter of the province’s total revenues) and net debt totalling $11.8 billion. After years of over spending and borrowing, Klein opted for immediate and decisive action.

His first budget put in place a plan that would see program spending reduced by 21.6 percent over the next three years. All government programs were re-evaluated and large-scale reforms were implemented. The results were stunning. By 1994-95, the budget was balanced and debt was being paid off. This allowed the province to begin saving in a rainy day fund and implement important tax cuts such as the country’s only single-rate personal income tax.

Like the early 1990s, the province now seems to be in stasis. Rather than take real action to correct the province’s finances, hoping for better days continues to be the plan of action (or inaction).

After several years of operating deficits and taking on new debt, Alberta has seen its net assets decline from $31.5 billion in 2007-08 to $9.7 billion last year. This week’s fiscal update essentially marches forward with the status quo despite a dramatic drop in oil prices (down roughly $25 per barrel from the budget’s forecast of $95). According to the government’s own calculations, a $1 per barrel decline results in a $215 million net negative impact to the budget. This reinforces the need for a change in direction.

There is a constituency in Alberta that believes the boom-bust of provincial finances is inherent to any energy-producing jurisdiction but this is not rooted in fact. A recent study comparing Canadian provinces and U.S. states with large oil and gas sectors found that Alberta was one of only three jurisdictions struggling with deficits and rising debt. The other provinces and states enjoyed surpluses. For instance, North Dakota, the newbie in the energy-producing crowd, recorded a surplus of 46.4 percent (as a share of spending). Texas, the more mature of the jurisdictions analyzed, enjoyed a surplus of almost 10 percent. Energy and boom-busts in public finances are not necessarily linked; they depend on political leadership.

The problem in Alberta has been the explosion of spending above and beyond population growth. As a 2014 study showed, Alberta increased program spending by $41 billion (cumulatively) over the 2004-05 to 2012-13 period beyond the rate required to account for population growth and overall price increases. Put differently, per person spending in Alberta, after adjusting for inflation, increased from $8,965 in 2004-05 to $10,672 by 2012-13. That 19 percent increase in real, per-person spending is why the province’s finances are in shambles now.

Contrary to the musing of potential tax increases, the solution to Alberta’s fiscal woes is to replicate the formula used by the Klein government in the 1990s. First, spending must be reduced and one place to look is the compensation of government employees. A comparative analysis of compensation in the government sector with similar positions in the private sector based on 2011 data indicated that after controlling for factors such as gender, age, education, tenure, type of job, and industry, government workers in Alberta enjoyed a roughly 10 percent wage-premium over their private sector equivalents. And this doesn’t include the more generous pensions, earlier retirement age, and higher job security also enjoyed by the government sector. Imposing greater compensation discipline on government sector workers based on private sector equivalents will generate considerable savings.

Second, spending reductions must be coupled with spending reform. By changing the way the province delivers programs, it can mitigate the effects of the reductions, as was done in the 1990s.

As Premier Prentice deliberates over the 2015 budget and the course for the province over the next few years, he would be well advised to replicate the successful lessons of the Klein era, which not only solved the province’s poor public finances but also placed Alberta on a path of heightened prosperity.

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