CRITICAL ISSUES BULLETINS -- 1995

Alberta Mid-term Report: The Klein Government

by Fazil Mihlar
The Fraser Institute

Contents

Preface        By     Michael Walker
About the Author        
Introduction
Policy Analysis
Conclusion
Appendix A: Methodology

Preface

The Fraser Institute expends considerable effort in the attempt to provide educational comment about the policies and programs of governments in Canada. Our interest in providing this sort of commentary is the hope that better understanding will make for better policy. There is some evidence that this is the case.

One vehicle we have used on seven occasions to convey information about the policies of particular governments is a report card evaluating all of the policies undertaken by the government. This document is one such evaluation. It is the second comprehensive evaluation of the policies of the government of Alberta done by The Fraser Institute. The first, published in 1984 and entitled Focus on Alberta's Industrial and Science Strategy Proposals was a critical assessment of a set of policies designed to create an industrial strategy for Alberta.

The Institute also provides an annual assessment of the tax and expenditure activities of the provincial governments. Repeatedly in those examinations, Alberta was found to have the highest tax burden of any province. This assessment was always questioned by the governments of Alberta since, they said, Alberta had quite low rates of taxation and no sales tax! They also said that The Fraser Institute didn't know what it was talking about.

What we were talking about, of course, was the fact that the spending of the government of Alberta was being sustained by a heavy taxation on resource revenues, and those revenues were part of the income of the people of Alberta. If these revenues were to shrink at any time, the government of Alberta would have to respond by levying very large increases in traditional taxation areas, or by initiating massive cuts in government spending. To a considerable degree, the report card evaluation contained in this Critical Issues Bulletin is simply a catalogue of policy responses by the current government of Alberta following the crisis induced by the shrinkage of resource revenues.

In making his assessment, Fazil Mihlar does not dwell on the "we told you so" aspect of the evaluation, but rather examines how well the government of Alberta has done in addressing the various policy problems which have been left by the retraction of government revenues. However, part of the educational impact of the report must be the realization that to some extent the radical policies reported in this paper would not have been necessary if the past governments of Alberta had paid more attention to the warning signs evidenced in our annual taxation assessments.

--Michael Walker

About the Author

Fazil Mihlar is Policy Analyst at the Fraser Institute. He received his B.A. in Economics from Simon Fraser University, his M.A. in Public Administration from Carleton University, and a Business Degree from the Chartered Institute of Marketing in London, England.

Introduction

A new contract

Premier Ralph Klein's Progressive Conservative government in Alberta will soon have no budget deficit. This development, however, goes far beyond bringing spending in line with revenues. Alberta's approach is completely different from those of the tax-and-spend policies of British Columbia, Ontario, and Ottawa. Indeed, it has surpassed the efforts in fiscal restraint of Newfoundland and New Brunswick. The Alberta government is trying to make spending reductions mean reorientation of government services--a new philosophy of market-driven delivery of public services--and an emphasis on the private sector to ensure economic growth and to produce jobs.

Learning from other countries

Several OECD countries have experienced foreign exchange crises related to large government debt, including Italy, New Zealand, the United Kingdom, and Sweden. The Tory program in Alberta emulates the reforms of New Zealand, which faced a currency crisis wrought by a mounting debt burden in the early 1980s. The New Zealand government's massive restructuring relied on speed and comprehensiveness. Alberta appears to be learning from this and the crises in other OECD countries and is planting the seeds for future prosperity.

Individual freedom

The Alberta plan, which could see Alberta's overall expenditures shrink by approximately 20 percent, is about how much money gets spent. But it is also about who decides how that money is spent, and who benefits from the spending. It is about how much Albertans expect their government to do for them. It is also about how much they are willing to do for themselves. It is about whether the private sector will remain free and be the engine of wealth creation. Ultimately, it is about who really wields power: elected legislators, unions, interest groups and social activists or individual Albertans? Alberta seems determined that the answer will be the latter.

Recognizing the fiscal problem

Whatever one may think of Alberta's plan, the government program is dramatic in its scope. After Mr. Klein's upset election as party leader in 1992, the party appointed a financial review commission to lay out the full extent of the financial condition left by previous administrations. It also sent a strong signal that the coming sacrifices would be spread equally. This was done, in part, by eliminating the pension plan for all new members of the current legislature, downsizing the cabinet, and consolidating government departments.

The Alberta plan

In January 1993, the province of Alberta changed administrations. The new government stated that it had a single resolve: to put its financial house in order over a four year period. To that end, the government put before the people of Alberta two plans: a four year deficit reduction plan designed to eliminate the budget deficit by 1996-97, and an economic development strategy shaped to allow businesses to create 110,000 new jobs during the same period. Premier Klein stated that "over the past year we have agreed that governments do not create jobs--the private sector does--and the role of the government is to create the economic climate in which businesses, large and small, can flourish." Ralph Klein, "Alberta aims for less government, more jobs," Canadian Speeches: Issues of the Day, Vol. 8, Issue 2, May 1994, pp. 47-50.Note

The plan sent a strong signal that the government would seek to eliminate the deficit without increasing taxes. With these two plans and a commitment not to increase taxes, the government called an election in June 1993. Premier Klein received a strong mandate to implement his party's program of action. Given this mandate, the Alberta government released a business plan entitled A Better Way: A Plan for Securing Alberta's Future. This document enunciates each department's goals, spending targets, and benchmarks for assessment. The basic thrust of the government program is to reduce the level of government involvement in the economy and to allow the marketplace to reach its full potential.

Keeping the promise

In January 1994, Premier Klein bought private television time to tell Albertans what lay in store for them. The government, he said, would not deviate from its course to cut spending. Health care would face cuts of 17.6 percent, while cuts to education, advanced education, and social services would range from 12.4 percent to 8.3 percent. Other department budgets would be cut by much more--by up to 78 percent.
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The Alberta government is trying to make spending reductions mean reorientation of government services--a new philosophy of market-driven delivery of public services.
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The changes embodied in the government's plan will revolutionize the way the government governs. Under the Premier's guidance, a massive reorganization of the public sector is planned. Many under-used rural hospitals will be closed and the delivery of health care will shift from hospitals to community-based services. Municipal grants will be reduced drastically and decision making will be decentralized to local levels. The number of school boards will be reduced from 140 to 57. All departments will undertake a regulatory review. Employment in the civil service will decline from about 34,000 in 1992-93 to about 27,500 in 1996-97, a reduction of 20 percent. Liquor stores,
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"Over the past year we have agreed that governments do not create jobs--the private sector does."
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registries, provincial parks, debt collection, and prisons will be privatized. To date, the government has made good on its spending reduction and its restructuring of government promises. If this trend continues, Alberta's government could become a model of fiscal responsibility and small government in Canada, if not in North America.

Government failure

At this juncture, it is pertinent to raise two general questions regarding the role of the government in the economy. First, do impediments exist that seriously restrict the ability of private markets to take advantage of all opportunities and, therefore, to realize the optimal allocation of resources among industries and activities? Second, can governments do better? The answer to both these questions is yes. Indeed, governments can do better by adopting "framework laws" that do not hinder the efficient working of markets.

The broader lesson to be drawn from the past fifteen years' experience is that many member countries within the OECD, including Canada and its provinces, have tended to overrate the risks and costs of market failure and to underestimate those associated with "government failure." Many government programs intended to stimulate industry have often failed because of the inherent tendency to distort markets. OECD, Structural Adjustment and Economic Performance, Paris: OECD, 1987, pp. 233-234.Note Economy-wide policies should ideally minimize the uncertainty surrounding the choices of individual firms and consumers, and they should be sufficiently neutral in their microeconomic effects as to not distort these choices.

Ingredients for a competitive economy

Alberta gives us an idea of the needed ingredients to restructure government, and, consequently, to ensure that markets work efficiently. The necessary factors include:

• less government spending,

• the private delivery of many public services.

A model to emulate
The changes in Alberta are exciting and remarkable in modern Canadian history. Other provincial governments and the federal government will do well to take note of the changes taking place in Alberta. Alberta gives Canadians the ideas needed to revamp the contract between the government and its citizenry. In short, it provides a framework to move away from dependency on government to self-sufficiency. There is, however, room for improvement in Alberta, especially in the areas of industrial, environmental, and health policy.
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Alberta gives Canadians the ideas needed for revamping the contract between the government and its citizenry. In short, it provides a framework to move away from dependency on government to self-sufficiency.
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This report uses a methodology developed to measure the successes and failures of the Alberta government. See Appendix A for an exposition of the analytical framework and methodology used to assess the government of Alberta's performance.Note Moreover, in the ensuing text, this study attempts to provide a survey of the activities of the government, an analysis of fourteen policy initiatives, and suggestions for possible improvements.


Conclusion

Fiscal conservatism

In an era when many politicians pretend to be "conservative," Premier Klein appears to be a true role model. He took over the province of Alberta in the midst of record spending, budget deficits, and public debt. Unlike the premiers of Ontario and British Columbia, Premier Klein is steadfastly resisting any new taxes. Indeed, his strategy is to reduce the deficit and debt by cutting spending. The policies adopted and proposed to date will result in:

• low taxes,

• overall, less government and a bigger role for the private sector in the economy.

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This program sets the stage for a prosperous and debt-free future for Alberta's children.
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This is a powerful combination of incentives. Indeed, it is one that gives Albertans a distinct advantage for attracting investment and creating jobs. And this program sets the stage for a prosperous and debt-free future for Alberta's children.

Doomsayers have been predicting that the Klein government cuts will cause massive unemployment and will drive Alberta's current robust economy into a recession. The leader of this pack is Mike McCracken of Infometrica, an Ottawa based economic research firm. He argues that Alberta may not recover for another 7 to 10 years. "The Doomsday Scenario," Alberta Report, February 14, 1994, pp. 12-13.Note
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Unlike the premiers of Ontario and British Columbia, Premier Klein is steadfastly resisting any new taxes.
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If 1993 is any indication, the government of Alberta should not put any faith in Infometrica's predictions. Even though the province cut spending by about $900 million and trimmed the civil service by about 3,000, Alberta had one of the country's highest economic growth rates in 1993. The Conference Board of Canada estimates that Alberta will finish 1994 with a real GPP growth rate of 3.2 percent, and will enjoy a growth rate of 3.3 percent in 1995. In addition, Alberta gained 35,000 new jobs, a major turnaround since 1992 when the province grew by 2.9 percent and lost 9,000 jobs. The Conference Board of Canada, Provincial Outlook: Economic Forecast, Summer 1994, pp. 36-38.Note

During the first half of 1994, the number of new business incorporations in Alberta soared from 7,229 to 8,779--an increase of 21 percent. In addition, corporate income tax revenue is already $135 million ahead of schedule according to Alberta Treasury's own first quarter budget update. To top it off, Alberta's oil patch is growing at an even faster rate than it was in 1993. In the first quarter of 1994, drilling was up 22 percent, natural gas production was up by 7 percent, and crude oil production was up by 4.6 percent over 1993. The Conference Board of Canada, Provincial Outlook: Economic Forecast, Summer 1994, pp. 37-38.Note In short, the indications are that the Alberta economy is resilient and robust.

In the final analysis, the closer the government gets to balancing the budget, the greater will be the temptation to spend any surplus on popular projects and benefits. Most analysts believe that government will choose one or more of three options: to recommit money to government programs and infrastructure, to cut personal and corporate income taxes to spur growth, or to pay down the $32 billion in accumulated provincial debt. Whether the government of Premier Ralph Klein is truly committed to fiscal conservatism, lower taxes, and a high level of private economic activity will be revealed by its policy decisions over the next two years.
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Overall Grade Point Average: B+
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Appendix A: Methodology

Evaluative criteria

This report uses eight different criteria to evaluate the success of the Alberta government in ensuring that a competitive climate exists for investment, job creation and future prosperity for Albertans. The evaluative criteria are as follows:

1. .Overall fiscal policy (level of budget deficit/public debt)
2. .Level of taxation
3. .Level and structure of program spending
4. .Regulatory environment (including privatization)
5. .Standard of public services (benchmarks for measurement)
6. .Market orientation (government as percentage of GPP)
7. .Internal markets (consumer choice)
8. .Restructuring of the public service

The criteria have been selected based on their relevance to economic competitiveness. All of the criteria selected for the analysis have a direct or indirect bearing on the competitiveness of Alberta's economy.

Grading procedure

This report examines fourteen policy variables. We standardize the results for each policy variable, such that the lowest score is zero and the highest score is 100. Each of the evaluative criteria is given equal weight in the grading scheme. That provides us with a separate grade for each policy variable. We combine these scores to obtain an overall average grade. One caveat is that not all of the evaluative criteria applies to every policy variable. In cases where this occurs, there is a re-assignment of the weights, so that there is an even distribution among the relevant criteria.

Grading key
            

A = 80 and above

B = 70 and above

C = 60 and above

D = 50 and above

F = 49 and below

Policy variables examined

One of the objectives of this analysis is to compile as comprehensive a picture as possible of the policy changes made by the government of Premier Klein. This report attempts to do this by examining a broad spectrum of policy measures: fiscal, health, education, social programs, labour, environment, agriculture, energy, deregulation, advanced education, and municipal affairs. The policy variables are evaluated using the criteria outlined above.

Remarks on methodology

Despite the attention that national competitiveness analysis has received, a perfect synthesis of the many issues involved in it has not yet been made. This report does not claim to provide the final word on sub-national competitiveness. We do think, however, that the checklist of eight factors outlined above does have a significant correlation to Alberta's competitiveness. We are using an economic dimension to assess Alberta's competitiveness.

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