Thursday, 8 November 2012

No crystal ball; just good planning required

“What do you get when you put five economists in the same room? Six opinions.”

Just because we do not have a crystal ball it does not mean that we cannot plan to manage risks. Today it has become more important for governments to manage risks. In light of what is happening in Europe and what can happen in the United States if they cannot agree on solving the fiscal cliff, even Canada’s governments should be preparing for another recession.

As the Federal Minister of Finance prepares his economic update we are told that Canada faces a 2%-2.4% growth for 2013and in Alberta 3.5% . We also face a $2 billion federal loss of tax revenue.

The Macdonald- Laurier Institute recently published a report  by Marc Joffe showing the provincial default risk vulnerability for 10-20 year and 30 year windows. Ontario has the highest risk in the 10-20 year window, but low and behold the so-called ‘have province’ of Alberta has the highest vulnerability in the 30 year window.

The reasons given for Alberta’s risk is that we have a large swing from net financial surplus to a large debt. We also have a population expected to age more rapidly than other provinces and of course the economy is exposed to volatile energy revenues.

Under the Canadian system there may be an assumption that provinces may be bailed out by the federal government in the event of a crisis. Presumably that assumption may also be true that provinces may bail out local governments under the same conditions. This system creates a cumulative problem that we should not rely upon.

With lower oil prices and a possible further recession Alberta is in no position to continue its path of large expenditures and reluctance to change the way services are provided. It has recently been reported that Alberta has a. $10-billion pension liability and a $4-billion maintenance deficits on its books.

The pension liability is one that should be tackled immediately. We can reduce its growth by changing the way we do business in Alberta. Through managed competition and privatization of services the province could reduce its future pension growth by minimizing the use of unionized labour which is the major source of growing pensions.

While the government of Alberta says that it will rein in costs in its next budget, there are some fears that politics may well interfere and prevent major reduction in expenditures.

Futhermore, if we face such a risks as forecasted by Marc Joffe, it would be prudent to put into place policies to minimize those risks. We can start by opening our doors to immigration of qualified people. To do this we must also look at our protectionist policies regarding the acceptance and recognition of foreign qualifications, Thus a growing younger population may alleviate the risks caused by the aging demographics.

Additionally we must both cut the spending spree and increase our contribution to the Heritage Fund. In IPSA’s 2006 report “A blueprint for Alberta” we advocated the following:
” In our opinion the policy of saving revenues from oil and gas should continue. However many of the policies must change. At the heart of these changes is that income from the fund should be reinvested and not used to top up general revenues. Alberta should also adopt a policy of not including oil and gas revenues in its budget because of their volatility. Based on conservative estimates of future resource revenues, we advocate that for the next 10 years, 75% of the net surplus be placed in the Heritage Fund, the remainder 25% or approximately $10 billion should be used to bring real infrastructure to par in the province. Roads, water and sewer should be a priority, and not ‘social infrastructure’. Once we have been able to close the infrastructure gap, we should gradually increase the percentage of the resource revenues allocation to the Heritage Fund, to be managed for future generations. While the proportion of savings to expenditure may vary in the short term, we still believe that a 100% savings, investment
in real assets after ten years is advisable. This policy will require that the government reduce its expenditures and have a better fiscal discipline. This measure is advocated to remove the savings from the hands of eager politicians who may decide to spend to build political legacies.”

The numbers may have changed but the principles remain the same. This seems to be truer today given the new fiscal environment surrounding us.  In conclusion we advocate, spending restraint, change in our saving pattern and labour practices. This demands transparency and a bipartisan plan to reform our fiscal strategy.

Marcel Latouche

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