ABCtech #29 27DEC14 Public Sector Financing – From Insanity to Stability – A Fiscal Fix for Alberta

ABCtech #29 27DEC14 Public Sector Financing – From Insanity to Stability – A Fiscal Fix for Alberta

This is the final edition of QuikTech Notes for 2014 and features two timely articles on public sector financing.  The first, proposes what Alberta should do to address its revenue short-fall.  The second, considers what governments might do with the anticipated $1T baby-boomer wealth transfer.

We also feel compelled to recognize the timely and long overdue opinion written by Ric Vivone on the Klein legacy that decimated Alberta`s public sector.  The deliberate damage is only now being addressed by the recently announced Premiers Advisory Council on the Public Service being set up to restore confidence in and among those who serve the public. FOR MORE

As we conclude the year we ask that you consider taking out a membership with the Alberta Council of Technologies Society.  These fees are the Society`s sole source of support.  May you and yours have a happy and prosperous new year. – Editor

From Insanity to Stability – A Fiscal Fix for Alberta

Albertans demand and receive some of the best public services in the world, but our political masters make sure we don’t pay for what we get.  Instead of levying appropriate taxes and fees as the economic rent for living in an amenable society, our governing politicians run away from their responsibility to ensure we pay our way.

Throughout the 21st century, Albertans have paid about 70 per cent of the cost of the public goods and services they consume.  the rest comes from selling off the family silver: Alberta’s energy resources.  Yet from Ralph Klein onward, every premier insists that keeping taxes artificially low — even if it means cashing out our children’s patrimony to pay for our daily living today — is the Alberta Advantage.

The 2011 Report – the Premier’s Council for Economic Strategy caused government sphincters to tighten when it stated the obvious:

“The true Alberta advantage is not the ability to create a low-tax environment by underwriting a significant proportion of government services with funds received from the sale of energy assets.”

Instead, it recommended paying our way for current spending and leveraging our resource wealth to build a more sustainable and diverse economy.  Premier Jim Prentice says he is ready to listen. He parses his words by saying Alberta will always keep a tax advantage, compared with other provinces.  So what might he do to fill in the $6 billion shortfall between what we consume, and what we pay for?

An easy short-term solution is modest changes to the Alberta tax system, aligning with federal taxation.  For a start Alberta’s personal tax exemption, the income level at which taxation begins,  would fall to $11,327 (for 2015) from $18,214. This change in itself would capture significant new revenues.  By abandoning its Klein-era flat tax of 10 per cent (part one of a tax reform where part two was supposed to be a sales tax), Premier Prentice can give most Albertans a tax cut while enriching the exchequer.  How?

Replacing the flat tax with four tiers aligned with federal taxation — say 7 per cent, 9 per cent, 12 per cent and 15 per cent — would give an effective tax break to more than three quarters of taxable Albertans by lowering the rates on the first $89,401 of taxable income.  This modest measure would free Alberta from revenue streams set by Middle Eastern oil sheiks. As for the future, there is eminent good advice throughout the Report.  – Satya Brata Das, Cambridge Strategies Inc.

What to do with the trillion dollar windfall?

A trillion dollars is about to enter the Canadian market, this is the magnitude of the generational wealth to be transferred as baby boomers formally retire. The transition will be one of the most defining moments of the century. What can we expect of government and industry? And what are the expectations of baby boomers and their offspring? We see 3 options and prefer one.

First, what we’ll term the CONSUMPTION option, is for government to “do nothing”. Everyone will enjoy one of the biggest splurges of consumer spending ever as the offspring of baby boomers eat through their parents’ significant inheritance, many opting to pay off their huge housing debt and further increasing their credit worthiness … for further consumption. Governments benefit from the significant sales taxes and employment generated. This option appears on the surface to be win-win. But is a consumption economy sustaining? We think not.

The second option we term PUBLIC SOLVENCY – and is quite likely. It features  governments grabbing the wealth of baby boomers by introducing a steep inheritance tax. The logic would be to retire government debt accumulated by feeding the voracious appetite of baby boomers for jobs and public services in health, education and governance. This option would have broad “public” appeal, and if introduced gradually, may even avoid shocking the baby boomer’s offspring and causing a significant voter abreaction. The solvency option does have appeal to debt conscious economists as it would strengthen the dollar and give governments more borrowing power for future spending. However, the option calls for a unifying vision, public confidence in government, and does little to stir the generation of sustaining wealth.

Thirdly, there is the ENTERPRISE option, appealing to economists who worry about the future and how to generate wealth-sustaining assets. This option calls for government and industry to get together to introduce incentives for baby boomers to invest in small business thereby  generating a boom in private equity financing and creating a new generation of enterprise. This approach appears to be gaining favour: governments stimulating entrepreneurship and innovation – already underway, the introduction of creative financing instruments – witness crowd-sourcing and bitcoins, relaxing regulatory restrictions for small investments – the new exempt market, and educating baby boomers who have the time, wealth and savvy to learn – and mentor – angel investing.

We are hopeful that governments will endorse ENTERPRISE, practicing what they’ve been preaching: free enterprise, small business, innovation, and balanced regulatory oversight to ensure sustained prosperity. That governments will allow interest rates – not taxation, and the allocation of natural resource revenues and the proceeds of ENTERPRISE to retire the baby-boomers’ debt. – Esir Pretne

Diane Francis on Alberta`s response to declining oil revenue

“Albertans will do what they always do: tighten their belts, shake out the high-cost producers and continue to be the country’s principle engine of economic growth.” – Diane Francis, Financial Post (14-DEC-27) FOR MORE