Can Alberta Afford to be Rich and Stupid?

Commentary, Role of Government, Frontier Centre

The Province of Alberta’s latest budget is fiscally virtuous in the sense that it’s debt-free for the first in more than 50 years. But it’s very big on spending, a record $25.5 billion, and short on tax cuts, even though its twelfth surplus in a row is equal in size to a small province’s entire budget. Some cry the budget is too big, others not big enough. But nearly everyone agrees that it lacks something even more important: new ideas.

Balanced budgets have been the law in Alberta for nearly ten years. Now that the province has reached it debt-free goal, the questions are: “What’s next? Beyond balanced budgets and spending hikes, how does a wealthy government provide good government?”

Finance Minister Shirley McClellan says this budget focuses on “investing in the next Alberta.” But what should the next Alberta look like? Enter Ruth Richardson
, the former Finance Minister of New Zealand, a small country with one of the world’s most dynamic economies. In a speech to the Frontier Centre for Public Policy in Calgary last week (see below for video links), Richardson made the case for a new level of government fiscal responsibility.

New Zealand’s vigorous reforms inspired Alberta’s spending control efforts during the 1990’s. Ten years later, Richardson, author of that country’s Fiscal Responsibility Act, has another round of advice. She says the latest international model for best fiscal practices goes well beyond balanced budget legislation. It includes what she calls an “Economic Constitution” containing a fiscal code of conduct mandating the highest levels of transparency in fiscal management, strict limits on taxes and spending, and rules to rein in regulatory rules that strangle entrepreneurial activity.

In a cogent message targeted to all Canadians, not just Albertans, Richardson warns that governments need to become what she calls “modern states,” and those who don’t take the necessary steps, even wealthy ones, will eventually get left behind. “Rich countries can afford to be stupid,” she says, “and they can afford to be stupid for longer than poorer countries. But they will get run over in the rush if they don’t get the fundamentals of modern policy right. China, Russia, Brazil, and India, among others, are posting high rates of economic growth and will pass places that waste resources with outdated and politicized policy models of the type found in the rich “G7” countries.”

What should a government rich in revenues but short on ideas do? First up, she says, figure out what the government’s role really is and limit it to performing “core functions.” In her view, these include public goods like the courts and the “rule of law” to protect property and individual rights, maintaining a strong currency and preserving the welfare safety net.

Second, she advocates we take a hard look at the quality of public spending and decide if it really is maximizing the public good. That means exposing all public services – particularly health care and education – to competition by shifting the state’s role from one of being a direct provider of services to being a purchaser of services. She would direct funding to the consumer, rather than to monopoly suppliers to force competition and promote efficiency among providers, which would lead quickly to better quality public services.

To backstop these items over the long term, the economic constitution with spending and tax limits. To promote prosperity and sustain a growth rate of at least 4%, governments need to maintain a balance sheet capable of sustaining its core functions. That means limits on government spending to no more than 20–30% of GDP. An efficient pro-growth tax regime would see services funded via a combined flat personal and corporate tax rate of no more than 20%. Mandated quarterly financial updates would take the politics out of electioneering by making budgeting and accounting procedures open and transparent. This would prevent “surprises” after elections like the fiasco of Ontario’s recent post election budget. Accrual accounting would quantify what outputs cost in government and provide an objective and neutral basis for choosing between least cost service delivery options, be they in the public or private sectors.

During the 1990s New Zealand increased its annual growth rate from 1.5 per cent to 3.7 per cent via quality public policy reform. There is no reason that Alberta could not exceed those reforms with Ruth Richardson’s vision of an economic constitution. It would lead the province to an even higher level of prosperity, improve the quality of public programs, and re-establish its position as the leading exporter of good ideas to the rest of the country.

Let’s hope Alberta is smart enough to accept the challenge.

This appeared originally in the Calgary Herald on April 27th, 2005