In 1996-97, the Alberta government spent more per capita than Ontario, Manitoba, Saskatchewan, and Nova Scotia. Meanwhile, Alberta is making no effort to reduce its $25 billion in gross debt. For this year, the cost of carrying this debt load is $1 billion. In spite of high public spending and a large debt, at the recently concluded Growth Summit many interest groups clamoured for more spending on an assortment of programs, including health and education. The Alberta government, given its expected budget surplus of about $2 billion in fiscal year 1997-98, also appears to be interested in spending. This policy direction, however, would be a mistake. Before considering any flurry of spending, the government should consider policy action that would bring tax relief to Albertans.

If Alberta is to ensure greater economic prosperity, lowering taxes and paying down the gross debt once the net debt is eliminated would be the best policy. There are several sound economic reasons for implementing tax cuts. A vast body of research evidence on the impact of taxes on economic activity indicates the following:

• High marginal personal income tax rates induce people to work less;

• High payroll taxes make labour relatively more expensive compared to capital. Payroll taxes have a negative impact on employment. In short, payroll taxes are a tax on jobs

• Taxing capital gains and dividends decreases savings and investment. Since productivity growth (wealth creation) is encouraged by the use of more capital equipment, these taxes will slow the rate of capital accumulation and economic growth

• A higher tax burden also encourages the growth of the underground economy. Empirical evidence suggests that the underground economy could currently be in the range of between 4.5 and 20 percent of GDP

• There are also deadweight losses associated with taxation. For each additional dollar collected through provincial personal income taxes, economic output is reduced by $1.66.

According to a World Bank study, economies with lower taxes experience more rapid economic growth, greater investment, and experience more productivity gains. Recent studies estimate that a 10 percent increase in the tax burden reduces a country's annual growth rate by 2 percent; there is a negative association between economic growth and high marginal taxes.

The tax cuts initiated in the United States in the 1920s, 1960s, and the 1980s have had a positive impact on the economy. Therefore, the evidence from the US and other parts of the world suggests that tax cuts are a necessary condition for higher economic growth.

In a free trading environment, with communication and transportation costs dropping drastically, capital will move to jurisdictions that offer the most hospitable business environments. Operationally, this means having a reasonable tax burden. Admittedly, Alberta has a much lower tax burden than other Canadian provinces. But when it is compared with that imposed by some American states, Alberta's tax burden is relatively higher.

Taxes must be seen as the price we pay for taking risks and indulging in productive enterprises—in other words, creating wealth. Anyone with rudimentary economics training knows that if the price of creating wealth and jobs is relatively high, we get less of them. If we lower the price of these activities, we get more economic prosperity and jobs.

If the Alberta government wants to ensure the province's long term prosperity, it must continue to reduce the overall tax burden and start paying down the gross debt. Since spending and debt servicing charges must eventually be paid by taxes, it is imperative that spending be kept under control. Moreover, reducing the gross debt will also free up resources for program spending.

If, however, the Alberta government decides to give in to the spending demands of special interest groups who are hovering around the honey pot of a $2 billion surplus, it could potentially undermine Alberta's future economic prosperity.