Say Hello to the 1980s Deficits in Modern Drag

Commentary, Taxation, Frontier Centre

In March 1987, then Alberta treasurer Dick Johnston—back when finance ministers were called “treasurers”—told Albertans they enjoyed the highest per capita program spending in the country.

Albertans also enjoyed a $3.3 billion deficit the previous budget year as a result of such spending; Johnston’s response to Albertans was: pay up.

Thus, Johnston’s remedy to red ink leaned heavily in the direction of increased taxes. In his 1987 budget, he raised corporate taxes by one-third, health care premiums by 28 percent, and fees in nursing homes by 40 per cent. He also raised personal income taxes in the hopes $1 billion could be added on the revenue side. In all, Johnston raised or introduced 23 separate taxes.

Balancing the budget with tax increases was impossible. It was an experiment in taxing one’s way out of a budgetary imbalance and guaranteed to fail. While a government might slip in a barely-noticeable tax increase without an effect upon incentives, a 23-item tax hike of a billion dollars is akin to smothering an ill patient with chloroform.

That reality left the spending side to help balance the books. In 1987, the treasurer did promise some budget cuts; Premier Don Getty and his treasurer had long hinted at and occasionally pruned spending after the collapse of energy prices in 1986. But compared to the tax increases of about 13 per cent above existing revenues, the spending cuts at a predicted four per cent of progam spending were underwhelming.

The 1987 actions were part of a plan launched the year before to balance the books by 1990. “A deficit of this size cannot be allowed to continue,” said Johnston in his 1987 budget remarks.

Except that it did. The province incurred $2.1 billion in red ink in 1990—the planned year for balanced books, followed by deficits of $1.8 billion in 1991, $2.6 billion in 1992, $3.3 billion in 1993, and almost $1.4 billion in 1994.

It wasn’t until 1995 that a surplus was produced and only after a deficit binge that left Alberta $22.7 billion in debt.

What finally turned the corner was not another 23-point tax hike; it was public clarity, first, followed second, by a political awakening in the Liberal party and then in the Tories that spending had risen to unsustainable heights and must be brought down.

Total program expenses in 1990 amounted to $13.8 billion and continued to climb, hitting a peak of $16.2 billion in 1993; program spending was cut back to $13.5 billion in 1995 and $12.7 billion in 1996.

But that never happened under Getty and Johnston, out of the premier’s chair and the finance portfolio respectively in later 1992; they were replaced by Ralph Klein and Jim Dinning.

The provincial government was only minorly helped by revenues, which were at their lowest level in 1990 and at their highest in 1995, the latter due to a significant uptick in resource revenue. But the province couldn’t have relied on that luck to balance the books. In 1996, the province’s own-source revenue, including from resources, again dropped. Without a spending chop, and some restraint in the increases in the following years, deficits would have been as common in the last half of the 1990s as they were in the first half.

Fast forward to 2009 and proponents of deficits appear to have dressed up in 1980s-style fiscal drag and the corresponding justifications.

But here’s the reality check for the recent years: Had Alberta kept program spending tied to inflation and population growth since 2001, program spending would have been $25.6 billion in the fiscal year just ended (the end of March). Instead, program expenses (I’m not including capital expenditures) were $11.2 billion higher at $36.8 billion in fiscal 2009. That was 43 per cent higher than can be justifed by population growth and inflation.

In 1986, at the beginning of the last provincial spiral into deficit financing, Premier Getty said that “The deficit can be handled. We are the strongest province financially . . . Despite cutbacks we still have the largest per-capita spending on our social services system of any province.”

Back then, Getty, as with apologists for red ink now, missed the relevant point he himself introduced: that above-average spending needed to change if the province was avoid a lengthy string of deficits.