The collapse in oil prices aggravated by Notley government’s economically damaging policies
The year 2015 was a difficult one for Alberta’s economy. First, the province was hit by a major decline in oil prices. Then, the provincial government introduced a slew of economically damaging policies, tarnishing Alberta’s reputation for providing a pro-growth tax and regulatory environment. These policies will have long-lasting, adverse economic effects. And finally, Standard and Poor downgraded Alberta’s credit rating.
Alberta’s difficult economic year began with the provincial economy being hit hard by forces outside of the government’s direct control. The decline in oil prices has particularly strained the resource sector, but also had a substantial ripple effect throughout the broader economy.
Unfortunately, this was not the end of the bad news, for 2015 also saw a wide range of economically damaging policy changes. For starters, the provincial government introduced numerous tax increases, essentially ending Alberta’s tax advantage relative to key competing jurisdictions.
On personal income taxes, the government moved away from a single pro-growth tax rate to a five-bracket system, with the province’s top income tax rate increasing by 50 per cent. In addition, the government increased the general corporate tax rate (one of the most economically damaging type of taxes) by 20 per cent. Moreover, the government announced that it will introduce a carbon tax, which will further increase the overall tax burden faced by Albertan consumers and businesses.
The provincial government wasn’t alone in chipping away at Alberta’s tax advantage; the federal government’s plan to add a new top marginal income tax rate will boost the overall top tax rate in Alberta from 39 per cent to 48 per cent, weakening Alberta’s competitive position relative to energy producing jurisdictions, particularly in the United States. Many of these competing jurisdictions have either low state level income taxes or none at all.
But the policy moves have gone beyond tax increases as the provincial government has also been active on regulatory issues, announcing it will increase the minimum wage to $15 per hour by 2018 (a 47 per cent jump). The government also introduced new environmental regulations and commissioned a review of the provincial royalty system.
Provincial policies governing the resource sector in particular have added regulatory uncertainty that has already made Alberta a less attractive destination for investment. The Fraser Institute’s annual Global Petroleum Survey, which ranks jurisdictions on how attractive their policies are for investment, found that Alberta has plummeted to 38th place in 2015 from 16th one year earlier.
Another troubling development in 2015 was the continued erosion of Alberta’s net assets. Due largely to chronic budget deficits, Alberta’s net financial assets have dwindled from $35.0 billion in 2008/09 to less than $4 billion in this fiscal year. The decline in Alberta’s net asset position continued during 2015, and the province will likely return to a net debt position in terms of financial assets next year for the first time since 2001. As a Fraser Institute study pointed out, Alberta’s persistent deficits and worsening financial condition are the result of undisciplined program spending over the past decade. Unfortunately, upon taking office the new government continued to increase spending beyond what was already planned for this year despite the large budget deficit facing the province. The deterioration in Alberta’s fiscal position was yet another painful economic development for Alberta in 2015.
As Albertans take stock on a tough economic year, it is important to look beyond the things that the provincial government cannot directly control (oil prices), and to the concrete policies they have implemented. The provincial government inherited a difficult situation, but many of its economic policies have made matters worse. Regardless of what happens to oil prices in 2016 and beyond, these policy choices will hinder Alberta’s future economic performance.
Steve Lafleur is a Senior Policy Analyst and Ben Eisen is Associate Director of Provincial Prosperity Studies at the Fraser Institute.