Thursday, January 31, 2013

In Alberta a deficit is inevitable, it's where we choose to put our money which matters

So I have run through Alberta's new public budget tool and it's about as lackluster in options as you would expect. It's no wonder that if this simplistic approach is taken to budgets that we continue to have problems.

There is no vision in the budgeting process, and all visions discussed outside of the budgeting process have no say here. In the budget process when it comes to spending, you can make cuts, and when it comes to existing, established sources of revenue all you can do is increase it. Alberta's problems though are going to take a lot more than a +/- to specific departments, Alberta needs to re-evaluate it's position and the long-term outlook for revenue and adjust accordingly. This would of course mean deficits for the foreseeable future based on the information presented there but what's important is we spend and invest on a path that provides some sort of a future rather than continually lowering the bar on our standard of living and services and pretend as though balancing the budget is the ultimate goal, it isn't.

Under traditional monetary systems, going into debt wouldn't be that bad under the duties that are supposed to be taken on by the Bank of Canada to be the sole provider of the nation's currency, but under our current model the Bank of Canada simply facilitates entry into a private, international, bond auction. Participating in this type of auction is required if we wish to be involved with free trade which is administered by the WTO. Under this system all of the interest on our debt is given to the private interests which invest in our debt, this goes for the municipal all the way to the federal. All of the interest we pay on our government debts effectively is drained from circulation while at the same time we borrow more which accumulates even more interest, etc.

Under the traditional system the interest on the government debts would be recycled back into the Bank of Canada and always stay within the possession of the taxpayer.

Why are these monetary details important? They are important because they are largely the reason that government finances and budgets now must be treated in the same fashion as corporate or household budgets. It is the reason that not running a deficit is so important as the worse the debt situation gets the worst your credit rating is, and the worst your credit rating is the harsher the interest payments become. We can see the detrimental effect a matured system like this has by observing Europe and soon the U.S. Under the traditional system there is nothing inherently bad about going into debt other than the chance you may inflate your currency away to nothing should you provide too much but under the current system the side-effects can be extremely detrimental and like most consumer debt which is based on the same fundamentals it is increasingly difficult to get out of the more money you borrow.

You can see the results of my budget here and clocked in at a $1.1B deficit. I'll provide some reason to the specific changes I made as my goal when playing with the limited options on budgetchoice.ca was not to balance the budget but to make some of the changes (that the program allows) which would set us up for the future. Again, this is very limited simply due to the fact that when it comes to spending for instance there is no option to increase spending, only make cuts.

Here are the options I changed from their defaults:
  • Eliminate future funding for Carbon Capture & Storage [-$60M]. This one was a no-brainer however I would add in addition that to coincide with this change and make it useful the Alberta government should keep emission rules the same as though it was in place and have strict penalties for companies which violate these rules. Let the companies foot the bill for this on their own or cease their operations. CCS is incredible overhead on the backs of the Albertans and we shouldn't have to foot the bill for it. Companies need to start covering their own overhead for Alberta to have sustainable budgets.
  • Cut funding for fiscal planning and economic analysis [-$1M].
  • Cut funds to investment, treasury, and risk management [-$2M]. In regards to the point above and this point I figured if we had any "fiscal planning", "economic analysis", or "risk management" then I wouldn't be doing this budget choice thing in the first place and Alberta wouldn't get so many mentions on my blog. Fire them, they suck.
  • Cut funding for international relations [-$2M]. Everybody knows Alberta exists and we have oil sands. We don't need any more trips to the Bilderberg to bring in business. Alberta needs to re-evaluate it's business model anyway and until we do so we really have nothing to sell. Alberta's energy is by far the most expensive energy in the world to produce, yes countries and such will always come back for more as energy is in higher demand and diminishing rapidly but on the same token these energy players will drop it without a second-thought should some form of cheaper energy come online.
  • Eliminate tourism promotions programs [-$10M]. Sadly much of our tourism promotion is funded purely to counteract the bad publicity that arises directly due to our choice of industry. The best promotion for tourism I think would be a state-of-the-art province, industry, and transportation, a look into the future and not the past. Our tourism promotion materials if you remember once featured a beach.. from England. At the end of the day Albertan's needs and Alberta's vision need to come first and tourism promotion is a want, not a need.
  • Cut support to the legislative assembly by 10% [-$7M]. Do we really need any more studies, panels, commissions, etc releasing report after report telling Alberta they've got some serious problems only to have them discarded, covered up, or buried? I'd like to see some action on the recommendations of all the reports we financed in the last decade before financing a whole bunch more in this one.
So there are my choices for spending cuts. Here are my choices for revenue increases (again, keep in mind that in my little virtual fantasy budget world there will be a third section called "program changes" beyond Alberta's simplistic spending and revenue):
  • Increase the corporate tax rate from 10% to 11% (+$420M). If there's any tax which should be raised first, it's this one considering that much of our spending is directly related to overhead needed to support many of their industries and which wouldn't be needed otherwise.
  • Increase Fuel Taxes by 4 cents per litre [+$490M]. This is probably the most controversial item I chose but I believe with good reason. Alberta has always been a province that centers around driving and there is rarely the motivation or drive to do anything truly visionary with our transportation system. In my mind a high-speed train between Edmonton-Red Deer-Calgary is a no brainer and major enhancements to public transportation is a must. Whether we like it or not, in a world of expensive-diminishing energy public transportation from an investment standpoint in the long-term makes a lot more sense than continually building more and more roads which fall apart faster and require a lot more energy and maintenance. If I could add options for increased spending I would be adding a $500M initiative to kick-start province-wide public transportation for the population which is largely located in urban centers. The gas tax increase would in this way have a minimal effect on the population while having maximum effect on the incredible fuel demand needed by our energy industry. Further, for those in agriculture this gas tax would be offset by an equal increase in their aid. Why? Simple, we need food and in a world where you're competing with Monsanto terminator seeds and industrial agriculture running on expensive fuel, farmers need all the help they can get. Again, my goal with my choices here is not to balance the budget, but to lay out within the strict box Alberta has created for itself some sort of a vision which has us looking further down the road than the next 4 quarters and oil price.
  • Introduce a second income tax for incomes over $250,000 [+$500M]. This option isn't exactly what I would want, I'd actually like a graduated tax system as opposed to a flat tax system, but that option isn't given so this is the closest I could come.

I would touch nothing else, in fact when it comes to many of the other departments again I would likely increase spending, taking advantage of current borrowing rates now and a stable credit rating and banked assets to properly invest in the start of a new economy. We're much better off taking a big hit now and making a valiant attempt to position ourselves for the future, then to continually try to minimalize the hit year after year in a slow downward spiral. As I stated before, I am only opposed to tax increases and the government's preferred revenue generation increases because I know they will simply turn around and throw it at the oil sands VLT, but on the other hand I have no problem funding a long term vision even though it is risky.

I noticed also that quite a few options for spending cuts and revenue generation were missing: MLA pay cutbacks and/or freezes, more penalties on pollution (not emissions, I mean pollution, IE: tailings), reduction or elimination of subsidies for the energy industry, greater electricity cost sharing initiatives due to the incredible power consumption of the industry. Greater cost sharing by industry towards health care expenses directly related to their activities, retroactively (IE: Asthma is found more often in Fort McMurray than anywhere else in Canada).

To conclude, I believe largely that governments all over Canada have severely underestimated the state of our infrastructure deficit and as I've noted before it's really starting to show when you compare our current public technology and services with those in the emerging economies. We have a lot of hidden expenses coming our way in terms of infrastructure repairs but our bottom-line focus tells me we likely won't deal with them until it's too late and much more costly; perhaps fixing the bridge after it collapses or fixing the pipes after the city floods. We're going to need to start thinking outside the box and reconsidering our assumptions about the way the current economy and market will behave as under the current model and mismanagement Alberta just isn't going to be prosperous despite our vast resources and out of anything this should make you the most upset of all.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

3 comments:

  1. Another brilliant essay, Richard. Now, when can you get to work on fixing B.C.?

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  2. Richard, you've made a compelling case over several posts that Athabasca bitumen is a burst bubble that won't likely be re-inflated for the foreseeable future. In that event, how can the pipeline proponents sustain their efforts over the next several years? Nobody wants to sell at a loss any more than the Alberta government can continue to run deficits associated with bitumen production. How in Hell does this end?

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  3. They can't without increasing public subsidy and even then with the surge of foreign workers we're expecting I don't quite understand how our infrastructure is supposed to support them.

    The repeated attempts to frame the problem as simply a lack of new markets lately is just the latest catch phrase. I've noticed that many pointed to Redford's budget prior to the election when it was proposed, which was obvious, but very few guessed it would drop to $80 so quickly following.

    Unfortunately if Alberta continues down this path beyond the climate impact of which you describe quite well on your blog, we're looking at severe water shortages which will result in energy shortages, and a rapid decline in Alberta's standard of living.

    Current oil prices provide no runway for growth and so it's perpetual recession everywhere, although I honestly believe that Canada's resources+spare population give us an edge other countries don't have, that's meaningless if the current management continues. Canada as a whole is putting a lot of eggs now in Alberta's basket such as Ontario and with the resource revenue dependance of both governments now Alberta really has the capacity to drag Canada through the mud with it.

    I don't see it ending well which is why the situation is so frustrating for me, unlike other countries which have already passed the point of no return, we're willingly following in their footsteps, voluntarily.

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