Concerning the Frequently Repeated Myth of High Government Spending in Alberta

I was just checking the latest howler from the School of Public Policy at the University of Calgary, written by Ken Boessenkool, also known as Stephen Harper’s pointman for GSK and Taser International. The “paper” is a prime example of policy thinktanks committing serious errors of omission in a quasi-academic paper meant to sway public opinion. The paper is entitled: Does Alberta Have a Spending Problem?, and follows the usual non-sequitir logic used by critics of Alberta’s government to make their case for budget cuts.

The paper discusses: “four possible explanations for Alberta to have significantly higher program spending than other provinces. First, it adds local government expenditures to the mix as some provinces push down their spending to the municipal level. Second, it takes a look at relative levels of capital spending, acknowledging that Alberta has higher pressures on the capital side on account of the net inflow of population. Third, it asks whether demographic differences might explain Alberta’s higher spending. Finally, it asks whether relative costs in Alberta justify the province’s higher expenditures. In short, two of these arguments help justify Alberta’s higher spending, one is neutral and the other suggests that the per capita Financial Management System data from Statistics Canada understates the level of provincial overspending. While there is some validity to each of these arguments, the paper concludes that, together, these possible explanations are not enough to close the gap between spending in Alberta and in other Canadian provinces.

In short, it is reasonable to conclude that if Alberta wanted to have per capita spending in line
with the other nine provinces, it would have to reduce its spending by $5 billion dollars.

To sum it up, the paper examines four reasons for Alberta’s high levels of program spending per citizen, taking into consideration four possible distortions or drivers:

1. The possibility that governments have offloaded government program delivery to municipalities.
2. Differences in capital spending requirements (because the half of Newfoundland that has moved here forgot to bring their roads, schools and hospitals with them).
3. Demographic differences (older people cost more than younger people, but Alberta’s population is younger, so we would expect this not to apply).
4. The fact that construction costs are so high in Alberta, as the province has to compete for construction trades with the oilsands developers.

But here is what the report did not include (click on graphs to enlarge):

1. Canada’s highest spending provinces are also resource rich oil provinces with very high levels of output per person.

When all the provinces are ranked according to their total levels of program expenditure (increasing from left to right), we can see that Alberta is in the middle of the pack in terms of overall total program expenditures, yet first in terms of output. If Alberta were a person, she would be the millionaire on the corner who still lives in the same house she grew up in, and drives a Chevy Caprice instead of a BMW. ( I am using total expenditures, which do include interest costs on debt, but I will get to this later).

The point is that Alberta can afford its high levels of expenditures, given its income. Not only can it afford the spending, it is in better shape than any province in Confederation. This is a point I have been trying to inject into the public debate for the past year, but it always falls on deaf ears, especially amongst the economically illiterate media types, whose misrepresentations are repeated by Henry, Martha and their representatives in government.

Let me be clear: Sure, Alberta has high levels of spending, but measured in terms of affordability, this province can definitely afford it because of our high levels of output. When you look at spending in the context of provincial output, the actual burden the government places on its taxpayers is small.

The above graph shows each province’s expenditures (both the total amount (in blue), and the amount net of interest costs that actually goes towards program delivery (purple)) as a percent of GDP.

2. Alberta’s Total Expenditures are more effective, because hardly any of that money is going towards servicing the interest cost on the provincial debt.

If you take total program expenditures, and subtract the amount that actually makes it to program delivery, the amount leftover goes to the banks and institutional holders of provincial debt. This is a province’s “debt servicing cost”. Because Alberta has such low debt (I know, I know – the capital bonds, right?), the difference between the two amounts is small.

I find this one a little crazy. The government of Quebec must spend almost ten times as much per person on just paying interest on its provincial debt compared with Alberta. Where, oh where to get those extra funds? It’s a good thing Alberta has all that money, isn’t it? Come to think of it, the both Boessenkool’s and my analysis don’t take those nasty equalization transfers into consideration.

3. Total Spending levels per capita are not an accurate way to measure “fiscal conservatism”.

In the Calgary Herald coverage of this report, Boessenkool is quoted as saying: “(Ontario Premier) Dalton McGuinty is 40 per cent more conservative than Ed Stelmach”.

I’m excersising my own normative judgement when I say this, but to me, fiscal conservatism implies a measure of affordability. This point requires us to examine a previous graph again:

Alberta’s government progam expenditures per person count for 12.9% of its GDP per person. Ontario, on the other hand, spends 16% of its per capita GDP. Examined in this context, Ontario is 24% less fiscally conservative than Alberta.

The logic that Alberta must somehow get its spending in line with other less affluent provinces is quite absurd to me. If my neighbour gets a promotion at his job or a bonus for his hard work, why does it follow that he must maintain his same level of monthly expenditures, or bring them more in line with everyone in the neighbourhood? Anyone who did this to their neighbour would get a swift kick, a punch in the face or laughed off as some communitarian looney tune who needs to mind their own business. Yet this is what Boesenkool suggests – that even though its expenditures relative to its income are the most fiscally conservative in the nation, Alberta ought to reduce its spending because in absolute terms, it makes the neighbours envious.

Even more astounding to me . . . why is this coming from one of Harper’s own Economic Hitmen? It’s totally unexpected and out of line with the “Hands off Alberta” approach characteristic of the Harperite U of Calgary economics crowd. It almost seems like this sort of “made for politics” fact-spinning study was meant to re-enforce the meme that Albertans are flying too high, that the Tories are drunken sailors, and only a Wild Rose Alliance type can solve the mess, when really it’s a complete strawman, a dead duck and a non-issue all in one.

Where might I agree with Boessenkool? I don’t agree with the road he takes to make his point, but I certainly agree that Alberta needs to find more resource revenue stability from other sources. I even agree with what I perceive as Boessenkool’s intent behind writing this paper – that Alberta can’t leave its fiscal fate so dependent upon these sources, because they aren’t here to stay, and we had better get our ducks lined up before that day arrives (faster than most think). Natural gas is on the decline in this province, and for years it’s been our financial bread and butter. Conventional oil is fading, and the high cost of bitumen production leaves little room for government taxation. Were it not for these resources, Alberta, Saskatchewan, Newfoundland and British Columbia would look like the rest of Canada. Come to think of it, if we were to subtract the fiscal effects of resource revenues from these provinces, Boessenkool’s arguement might even hold some water. But to do so would reveal a revenue problem that’s far worse than our so-called spending problem.