The frustrations of exploding deficits

November 8th, 2010
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My “LEtter from Calgary” column from the October 2010 issue of Investment Executive newspaper:

Alberta’s deficit has never been higher, and dealing with it could be damaging

What do the most left-wing government in the U.S. and the allegedly most conservative government in Canada have in common? An addiction to spending amidst self-righteous insistence that the problem is a lack of revenue.

In the U.S., the Democrat-controlled Congress, with the co-operation of President Barack Obama’s administration, has increased annual spending by considerably more than US$1 trillion while blaming previous “tax cuts for the rich” for the galloping shortfall.

In Canada, Alberta’s Conservative government recently released updated figures showing a deficit of almost $5 billion, a gap that refuses to close despite economic recovery and a rebound in oil and natural gas drilling.

The U.S. financial crisis is incomparably more significant to the wider world. But both phenomena have this in common: they are rooted in economic downturns not of the government’s making. Yet both were avoidable. Each government remains in deep denial or is simply dishonest in professing an inability to deal with the problem except through higher revenue. That claim is ludicrous, as spending in each jurisdiction climbs without end. There’s always need for some new program, and never the will to wind down an old one.

Updated financial figures released in late August by Alberta’s new finance minister, Ted Morton, forecast a fiscal 2011 deficit of $4.8 billion — an all-time record. Morton made the most of complex interplays on the revenue side — corporate income taxes up, personal income taxes down; mineral lease sales up, royalties down; etc. He even hinted that erasing the deficit might require Alberta adopting a sales tax. None of it, so Morton’s message went, has to do with spending.

Bizarrely, the local news media, which largely despise the provincial Conservatives, provided cover for Morton’s line. Coverage went on and on about movement among the various revenue sources. One columnist positively clamoured for a sales tax. Ignored or buried near the bottom of stories was casual mention that spending was again overbudget. That is, over and above the already planned year-over-year increase, due to the latest in a line of “one-time” emergencies.

Alberta’s spending has gone up and up for 15 years, zooming from $14 billion in the early ’90s to almost $40 billion today. It’s risen faster than population growth, economic growth or inflation — in many years, faster than all three combined. That’s why Alberta has a deficit. Capital spending was recently moved to a separate account, hiding a big part of the deficit. It’s now truly at $7.6 billion — by far, Alberta’s highest deficit ever.

This is the third ruinous and avoidable cycle of overspending and financial crisis in Alberta that I’ve lived through. Similar events happened in the ’80s and ’90s, causing enormous damage and setting back the province’s progress by years. Each time, the political sob story over insufficient revenue was the same; and yet, in the end, resolution required deep spending cuts each time. Going through the same cycle a third time in barely a generation is outrageous.

And embarrassing. Alberta used to be a fiscal leader, a beacon of sound financial management. Back in the mid-90s, former premier Ralph Klein was written up in leading U.S. financial publications as someone whom profligate state, provincial and federal governments should emulate.

Nowadays, we’re mere spectators. The heavy lifting of fiscal leadership is being done by U.S. Republican governors such as New Jersey’s Chris Christie, Indiana’s Mitch Daniels and Minnesota’s Tim Pawlenty. They are slashing spending, refusing to increase taxes, facing down counterattacks by public-sector unions and vetoing deficit budgets passed by Democrat-controlled state legislatures. And the public, for the most part, is rallying behind them.

We used to do this stuff in Alberta. Are we even listening?

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By George Koch