Ok, so everyone says that Alberta has a “spending problem”.
Really? Let’s get real folks. First it is easy to throw around big numbers to scare the pants off everyone.
It makes for great political reasoning – in this case to slash spending on government programs.
So, let’s do some comparisons.
I’ll use BC as the comparing baseline because everyone is raving about its fiscal performance.
I will also compare everything on a GDP per Capita basis. To be clear, that is the entire level of economic activity within a provincial jurisdiction (in dollars based on current price levels) divided by the population of the province.
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Note: This article represnets the opinions of the author and does not necessarily reflect the views or opinions of FocalPoint or myself.
It presents an interesting point of view of how investing in growth, even in the face of apparent troubles, can be a solution and not an irresponsible act that worsens the situation.
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So…for BC the GDP per Capita is $57,333. Another way of saying this is that every man, woman and child that makes up the population of BC contributes $57,333 to the BC economy.
For those non-economists, there is some “reasonableness” to including everyone. Specifically, the gross domestic product (GDP) is based on personal consumption (that’s us buying stuff) + gross business investment (by public and private companies) + government investment (in programs and infrastructure) + government spending + net trade (exports – imports). Each component provides a percentage of economic contribution to the total (100%).
So…even if a mother buys diapers for her newborn girl, the “purchase” is contributed to the child (not the mother), thus everyone needs to be accommodated (that is the entire population) in the GDP.
Got it?
Ok, let me continue.
In BC the total accumulated debt of the government is approximately 18% of GDP per Capita. So, every man, woman and child in BC carries $10,320 of debt on behalf of the government.
The BC government delivers about $10,637 of goods and services per person. That is approximately 18.6% of the GDP per Capita.
Another way to look at this is that BC “invests” $10,637 in each person and gets a return of $57,333 of economic activity from each individual. It is this economic activity that generates revenues to the government in the form of taxes, licenses, permits, purchased services, etc.
[quotes]But, wait…what about the $10,320 of debt each person carries.[/quotes] Well, that is paid down through economic activity. In other words, the NET GDP per Capita is $47,013. While NET GDP is rarely used (except in the geeky world of economists and financial experts) its purpose is to “say” that the economic activity is being impeded because not all the gained value can be re-invested into the economy. Some of the gained money needs to pay down the debt.
So…let’s look at Alberta. The GDP per Capita of Alberta is a whopping $78,213. While this is a 2017 statistic, Alberta’s economic activity has remained similar in size in 2018. 2019 is shaping up to be a repeat performance. [quotesright]How is that possible? Because folks, we are not in a recession! We also have been experiencing modest growth. [/quotesright]
In Alberta the total accumulated debt of the government is approximately 6.5% of GDP per Capita. Thus, every person in Alberta carries $5,084 of debt on behalf of the government.
The Alberta government delivers about $12,517 of goods and services per person. That is approximately 16% of the GDP per Capita.
Another way to look at this is that (like BC) Alberta “invests” $12,517 in each person and gets a return of $78,213 of economic activity from each individual that generates revenues to the government in the form of taxes, licenses, permits, purchased services, etc.
If I accommodate for the accumulated debt of $5,084 per person then the NET GP per Capita in Alberta is a healthy $73,129.
What does this mean? It means that Alberta, through its hard working and highly talented labor force, is making enough money to pay governments bills. We are not broke!
So, why the deficits?
Because the problem is on the operating side of the discussion. You see folks, there are two parts to the financial story of ever government.
The first is economic activity…that’s the story I previously told you.
The second part is the “utilization of revenue”. This is where the Alberta Government is currently focusing on. Some believe that Alberta has a “spending problem”. In other words, the government spends more on delivering its programs (in the form of services predominately) than the collected revenues (taxes, royalties, etc.).
Today, the government has a short fall. That is true. In part because of a drop off of oil and gas royalties/fees/permits etc.
So, the government is borrowing money to address the shortfall.
[quotesright]But, here’s the thing, borrowing money and accumulating debt that continues to drive economic activity is actually a good fiscally responsible strategy. [/quotesright]
That is what Alberta has been doing over the last 4 years and the results show – high levels of GDP per Capita and modest economic growth that has staved off a recession.
Yes, Alberta’s debt is accumulating. However, the key factor is GDP per Capita. If it drops, then percentage of debt to GDP will obviously increase. That means that the debt per person would be increasing and impeding re-invest of gained value back into the economy.
But that is not what is happening in Alberta. Spending is not the problem! Alberta has room to borrow!
Consider this, Quebec has a debt to GDP level of over 40%! It is why they will never be a “have” province and equalization payments will always flow to them.
What is needed is a stimulation of the economy. Yes, that means more deficits in the short term BUT the GDP per Capita will remain high, and the debt levels will be manageable.
It is only a matter of time (my economic estimate is 2 years) before Alberta starts to “fire on all cylinders” again.
The ONLY THING that will impede a return to high revenues is a REDUCTION IN GOVERNMENT SPENDING IN THE PROGRAMS THAT ASSIST CITIZENS.
[quotesright]Any government, be it federal or provincial has one primary objective – to create a healthy, educated labor force that can achieve high levels of productivity. [/quotesright]
I know that I am going to take a bit of flak for my position, but I am not just "prattling on" - I have degrees in finances, economics and an MBA.
-by Dwayne Popowich, Management Consultant to Public Sector and Energy Organizations
