CALGARY—The cure for Alberta’s ongoing fiscal roller-coaster, according to a new report from the C.D. Howe Institute, includes both a modest sales tax and a four-year freeze on public spending.

Levying a provincial sales tax or PST is seen as unpalatable by nearly all of Alberta’s major political parties. During April’s provincial election, Liberal Leader David Khan was the only one to suggest a sales tax be implemented. Even if there was the political will to adopt a PST, it isn’t easy in Alberta: the provincial government is legally required to hold a general referendum before doing so.

Economists, however, note more and more that a provincial sales tax is a more sustainable way to fill the government’s coffers compared to its reliance on increasingly volatile oil and gas royalties to fund current spending. The C.D. Howe Institute, a major public policy think tank, released a shadow budget report on Thursday suggesting that Alberta adopt a three per cent sales tax, which would allow provincial governments to sock away resource royalties for future generations.

“We weren’t paying taxes and it was easy to have more generously-funded public services because of that — but you’re spending the bricks of your house,” said Grant Bishop, the report’s author, in an interview.

By saving and investing these royalties, he explained, future Alberta governments could use the returns to tackle major demographic challenges such as ballooning health care costs for an aging population over the next several decades. Bishop described royalties as a “one-time conversion” of non-renewable resource revenue — unlike the steady flow of sales tax revenue.

“Looking ahead to the coming decades, without a change in course, Alberta’s structural deficit will widen as economic growth slows, demographics drive increased demand for spending, and debt services costs escalate,” the shadow budget reads.

Saving money from royalties generated through oil and gas activity is a decades-old idea. Legendary Alberta Premier Peter Lougheed launched the Alberta Heritage Savings Trust Fund in 1976 to save money for top social priorities like health care, research, and education. As of June, it was worth around $18 billion — past provincial governments have raided the fund during tough economic times.

The shadow budget recommends implementing a sales tax only after Alberta’s budget is balanced through cuts in 2022-2023. Under its recommendation that all resource revenue be saved after the budget is balanced, the shadow budget estimates that the fund’s assets would rise to roughly $100 billion by the 2031-2032 fiscal year.

By comparison, a similar fund set up by Norway, another top oil and gas producing country, holds around $1.1 trillion according to a recent Reuters report, although there are key differences in how both funds are managed.

Bishop also said a PST, sometimes known as a consumption tax, is less invasive than an increase to Alberta’s provincial income tax. It rewards frugal spending, he said, unlike personal income taxes, and also means tourists to Alberta will contribute to the tax base. Their shadow budget also recommends cutting the lowest marginal income tax rate by two percentage points to bring the province in line with Ontario and British Columbia’s rates.

“You want to restore balance in the least costly way,” Bishop said. “All taxes, even the least distortionary ones like a consumption tax do have some costs to the economy.”

The report also recommends that Alberta adopt a fuel surcharge under the federal backstop rather than Alberta’s former carbon tax — repealed by the United Conservatives shortly after taking power.

“A uniform price on carbon is the right way to incentivize reductions in the most efficient way,” Bishop said.

The C.D. Howe Institute’s recommendation on how to balance the budget is also in line with the findings of the United Conservative-commissioned MacKinnon report released in September: Cut back spending on Alberta’s public sector, particularly on wages for health care and education workers.

The shadow budget proposes cutting inflation-adjusted per capita spending on health care by 14 per cent and education by 11 per cent over the next four years. It calls for a restructuring of hospital funding, fee-for-service rates for doctors, teacher salaries and per-student funding for universities.

While Albertans enjoy the highest average incomes in the country, Bishop said the government can’t justify spending what they do on workers in these sectors.

“These are hard working professionals — nurses and doctors and teachers — but the compensation that they are paid is out of line with what those professions are paid in other provinces,” Bishop said.

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He also pointed out the cost of living in Alberta is comparable to other provinces they looked at. Their report finds consumer price levels in Edmonton and Calgary in 2018 roughly on par with a 12-city national average — and far lower than those in Toronto and Vancouver.

Alberta’s upcoming budget is due to be tabled on Oct. 24. Details haven’t been formally released, but the MacKinnon report’s findings suggest it will be austere and dramatic. The shadow budget refers to this budget as a once-in-a-generation chance to structurally alter Alberta’s spending for not only the next fiscal year, but decades to come.

“In making the difficult decisions ahead, Albertans must take a long and hard look at how the province compares to its peers and support action to ensure that Alberta remains a competitive place to live, work and invest,” it reads.

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