The MacKinnon report is a serious proposal to fix Alberta’s real problems
The much-anticipated report from the Blue Ribbon Panel on Alberta’s Finances was released Tuesday, recommending that the province virtually flatten nominal spending over the next four years. Relative to the policy status quo, this implies a $5.5-billion cut or roughly 10 per cent of operating costs.
No doubt, opposition parties and special interest groups will howl about its 26 recommendations, accusing the Kenney government that it will cut back frontline public services. Alberta taxpayers should pay no heed to the noise but read the report itself. It has a lot of sensible ideas that could achieve budget balance while improving public services. Efficiency measures such as better processes, constraints on compensation and reducing regulatory costs can go a long way to achieve a balanced budget.
The report begins by describing Alberta’s fiscal problem. The bad news is a recent downgrade in Alberta’s growth means that the province will be short $1.7 billion in revenues for the 2019/20 fiscal year compared with the NDP forecast in the third quarter of 2018/19. Even worse, over four years, the accumulated deficit will explode by a further $22.8 billion, resulting in a sharp rise in provincial indebtedness. By 2022/23, the status quo deficit will remain elevated at $6.2 billion, net debt will reach $66.6 billion and debt servicing costs are forecast to be $3.7 billion, making it one of the largest provincial spending items.
As the committee states, resource revenues, investment income and corporate taxes are highly volatile, making forecasts difficult for any expert. With a not-unlikely global recession in 2020-21, another $22.8 billion in revenue could be wiped out over the next three years. Constrained market access for oil would add on another $5.8 billion in lost revenue.
This is a bleak picture — Alberta’s current fiscal position is simply not sustainable. Not everyone might believe this. The NDP government’s update before the spring election showed a balanced budget by 2023/24. But that forecast was based on a zealous revenue growth forecast of 36 per cent over five years, already wrong in this year alone. “Hope and prayer” is obviously not a solution — Alberta has had too many past governments letting deficits rip with false expectations of recovery.
Many will also argue that Alberta has a revenue, not a spending, problem. While the committee did not have mandate to look at taxes, one dramatic chart in its report on page 13 tells it all. Since 1999, Alberta’s per capita spending has grown faster that the average growth across all provinces. Even after the oil price drop in 2014, the NDP government irresponsibly maintained the same pattern with per capita spending rising faster than the Canadian average.
This is why many Albertans, who have seen friends and neighbours suffer from losses in income and employment, will likely support spending constraint. As shown by the report, the public sector has not shared economic losses with its 5.4 per cent growth in employment and 12.1 per cent growth in compensation since 2015. With rising income and property taxes, Albertans want action with public spending.
So what does the committee recommend? It focuses on three major programs — health ($20 billion), primary and secondary education ($8 billion) and post-secondary education ($5.6 billion) — as well as capital spending ($6 billion) and public-sector compensation (55 per cent of total spending). I cannot do justice to this 76-page report here but let me illustrate the committee’s approach to the most important expenditure item: health.
As the report shows, Alberta spends the most per capita on health care compared with other provinces, despite having a younger, less-ailing population. With its spending rising by 60 per cent in the past 11 years, it has achieved mediocre delivery outcomes as measured by numerous factors such as life expectancy, in-hospital sepsis per 1,000 population, wait times for hip and knee-replacements and infant mortality.
Alberta’s current fiscal position is simply not sustainable
Excess spending on health — $3.6 billion more compared with the average of Ontario, Quebec and B.C. — could be addressed by policy improvements. These include, for example, building more incentives for alternative care payment systems rather than fee-for-service for family care teams, creating more options to hospital care (community care, non-hospital clinics and home care) and more use of Licensed Practical Nurses to save on physician time and expense.
Much of this is not new since other provinces have already been adopting these practices but at a larger scale. Ontario, for example, has successfully constrained health care spending to two per cent annual growth this past decade (about two-fifths of Alberta’s growth) with better outcomes than Alberta. It is not impossible to have cake and eat it too if better processes and compensation practices are adopted.
The committee also recommends several changes to compensation both in health and broad public sector. Surprisingly, its only concrete recommendation is to increase compensation for non-unionized labour who have not been eligible for merit/progress increases similar to unionized staff. However, it recommends that Alberta adopt a legislative mandate to set salary levels for public-sector employees, which would be a basis for back-to-work legislation as in Manitoba.
As for capital spending, the committee rejects the 2015 Dodge report that suggested Alberta did not spend enough on infrastructure by comparing capital spending as share of GDP across the provinces. The committee was right that this was the wrong comparison since infrastructure spending should not depend on whether the province is making more money from selling oil dug out of the ground. Instead, the committee recommends bringing per capita infrastructure spending to a level similar to other provinces.
To ensure spending constraint after the immediate four years, it recommends the adoption of a fiscal rule that program spending should rise no faster than Alberta household incomes after 2022/23. More analysis is needed of this recommendation including back-testing to see what it would have meant in the past. Household income is not necessarily the right measure since it includes government transfers. It’s far from clear that Alberta should spend more on its programs if, for example, the federal government lines the pockets of Canadians with a guaranteed income.
Make no light of it. The report provides a good basis for a debate about Alberta’s fiscal future. More important, it gives the Kenney government an expert-based view on how fiscal discipline could be achieved while improving public services. Expect much of it to be adopted in a forthcoming budget.
Jack M. Mintz is President’s Fellow, School of Public Policy, University of Calgary. He wrote a paper with panel chair Janice MacKinnon on Alberta’s budgetary problems in 2017 at Policyschool.ca.