8 A Disciplined PST

The Credit Union: An Example of Effective Fiscal Discipline

My experience in financial management at Servus Credit Union, a member-owned financial cooperative, may provide some insight into how the Alberta government can build public trust and, ultimately, set the stage for a conversation about a sales tax. A credit union serves as a good role model for government in part because, in many ways, the tensions that exist in managing a credit union are very similar to those that exist in government:

• The owner/voter is also the customer. The people paying for the services are also those receiving them, with no third party taking profits in between.
• The owners/voters do not have a uniform set of needs. Often, what is desired by one group is opposed by the other.
• Governance is rooted in the principle of one vote per owner/voter. Power is democratic; it is not based on the size of owners’/voters’ economic interests.1
• Credit unions and governments both have very wide mandates and are not profit-maximizing entities. Their mandate includes social, environmental, worker, community, and other directives.

I have found that it is possible, in a cooperative business, to gather general member support for spending of revenues that would have otherwise gone back to members, if four criteria can be satisfied:

1. Real need. There must be a real need for the spending that members can understand and to which they can relate.
2. Fairness. Members must believe that the funds that will be used to pay for this need will be raised equitably.
3. Effectiveness. Members must believe that the funds raised will be used to address the specified need and not spent on initiatives to which the members have not agreed.
4. Efficiency. Members must believe that the funds will be used efficiently to actually address the need, rather than being used to skirt around the issue and avoid making difficult cost management decisions.2

Like a cooperative business, government must garner support for its revenue and spending decisions. If a government truly intends to use the PST to stabilize revenues and support quality services rather than to fund excessive spending and avoid cost management, it could try applying these same credit union criteria. Let’s look again at these four criteria, this time in terms of how the Alberta government could use them to guide its approach to a public conversation around sales tax:

1. Real need. Alberta would benefit from a stable source of revenue like a PST, particularly because non-renewable resource revenue is very volatile and appears to be on a long-term downward trend. A PST could improve Alberta’s credit rating and, through this, its cost of debt. A PST could also be used as a counter-cyclical tool. This would reduce pressures on the government to raise taxes in an economic downturn and ensure funding for critical public programs. Framed with these ends in mind, Albertans might understand and relate to what a PST can do for them.
2. Fairness. Everyone has a different definition of “fair.” Still, since a sales tax is functionally regressive (that is, it will represent a higher percentage of the income of lower-income earners), introducing some form of refund for lower-net-worth individuals would likely help meet this criterion.
3. Effectiveness. Understandably, while people may agree with the rationale in item 1, most voters likely do not trust governments to use PST revenues for their stated purposes alone, whatever those may be. A framework like the one I propose later in this chapter could go a long way to showing that the government truly intends to (and has little choice but to) use PST revenues for promised purposes such as health and education. In good times, the government should be able to fund fundamental services without using all of its annual PST revenue. It can thus reduce the flow of PST into its operating budget in good times, constraining the amount of money available to it to spend on new projects and preserving funds for core services in bad times.
4. Efficiency. Buffet’s institutional imperative makes it far too likely that increased revenue from the introduction of a PST will result in increased spending plans or avoidance of cost containment strategies unless a clear discipline model is in place. Establishing discipline around the use of PST funds by reducing their flow in good times and increasing it in bad times would force a certain amount of spending efficiency. With fewer available funds to soak up, government can constrain the institutional imperative: fewer available funds means less impulsive spending. Less revenue in good times also helps motivate cost-effective management of programs even when the economy is strong. Such a framework of fiscal discipline should provide some comfort to voters by showing them that adding PST revenues to the province’s revenue mix would neither contribute to excessive spending when times are good nor higher income taxes when times are bad.

My proposal, then, is that, by establishing a numeric discipline model around when to use and when to save PST revenues—and, crucially, by communicating this model to Albertans—the Alberta government and the province’s voters could actually begin to have a real conversation about a sales tax and how it can achieve what both parties want from it.

A PST Fiscal Discipline and Stabilization Framework

Since 1980, average real GDP growth in Alberta has been approximately 2.6 percent. Between 2009 and 2020, however, growth has been negative in five fiscal periods (table 8.1), and Alberta has run deficits in all but one year (Statistics Canada 2021). If the intent of a PST is to help create more stable revenues, some might argue that eliminating the PST in better-than-average economic times—that is, times when growth is above 2.6 percent—and implementing it when the economy and government revenues fall would seem to be consistent with this goal. However, this type of implementation presents two problems: first, doing the PST hokey-pokey year by year would drive everyone up the wall; and second, applying a consumption tax in bad economic times, when consumers and the economy can least afford it, will do more harm than good. A better solution would be a commitment by the government to only take the PST into general revenues that are for spending when the economy is weak, and to allocate PST revenues into a segregated fund when the economy is strong. This would offset the need to raise taxes in economic downturns by creating a pool of revenues to fund that offset in economic upswings.

With a properly structured strategy, the government could restrain itself from succumbing to the institutional imperative. Doing this will require a certain amount of fiscal discipline. The system I propose here would give the Alberta government this discipline in the form of objective rules to follow regarding the use of PST revenue. The government will put some or all of its PST revenue into a reserve fund in good times and will give itself access to more than a typical year’s PST revenue in bad times. This objectivity negates the need to argue about how to use revenue and avoids the problem of building spending habits in good times that can’t be sustained over the long run. In my experience at Servus, this type of restriction actually made the job easier, in part because it was transparent to our board and all members of management. A set formula like the one proposed here increases the odds of Albertans actually being open to discussing a sales tax because it will increase the odds that

Note: All figures are hypothetical and are used for illustration purposes only.

• Alberta taxpayers will actually see the benefits of paying PST in the form of lower provincial debt costs;
• Alberta taxpayers will actually see the benefits of paying PST in the form of lower tax increases in periods of economic weakness;
• Alberta taxpayers feel more comfortable that the money they are paying in PST does not go toward spending they don’t support, particularly in the good economic times; and
• the Alberta government will have access to increased PST revenues when other revenues fall during an economic decline.

The framework (shown in table 8.1) uses a lagging-year system that bases the allocation of PST revenues into the general revenues of one year (year y) off of the actual PST revenues of the previous year (year x). The PST income that goes into government revenues in any given year are determined by an objective system that would provide a degree of certainty for the government regarding its budget. Because the PST income for a given year y is based on historic GDP figures and the amount of PST collected in the prior year x, the government does not have to guess how much PST income they have available to spend in year y. They already know that number at the beginning of year y, when they are building the budget for that year. Using the discipline and stabilization framework outlined in table 8.1, we can then see how funds might flow to and from a PST reserve fund as a jurisdiction’s GDP rises and falls in table 8.2.

Tables 8.1 and 8.2 are for illustration only. Although these tables use Alberta’s historic GDP data to make estimates as to where GDP trigger points could fall and what percentages of PST could be allocated to/from the PST reserve at each of these points, they present a simplified example of the proposed framework and do not represent real-world numbers. Still, we can use them to gain some important insights about how this type of framework might work. In table 8.2, for example, we see that the economy is functioning well in our hypothetical year 1: it is growing at a rate above the historic average. Based on the fiscal stabilization structure proposed in table 8.1, this means that all of the money from the PST goes into a reserve fund, and none is available for the government to spend that year. This helps constrain overspending in good times. By the time the economy has fallen into a recession in year 4 with negative 1 percent growth, the amount of PST revenue available for current-year spending has risen to $4.65 billion, or 150 percent of the PST revenue from year 3. This amounts to 100 percent of the PST revenue collected in year 4 ($3.07 billion) plus an additional $1.58 billion drawn from the PST reserve fund. The idea here is to use the reserve savings from economically prosperous times to help fill the hole that declining tax revenues have created without resorting to increased taxes on individuals and corporations. If effective, the result should be smoother annual revenues throughout the economic cycle.

Note: All figures are hypothetical for illustrative purposes only.

Year x: previous year

Year y: current year

* In the first year of the PST-GDP stabilization framework, all PST revenue would be added to the PST reserve fund.

† Amount needed to top up PST collected in year y to total PST available for year y spending.

To provide some historic context, between 1994 and 2020, Alberta has had real GDP growth below 1.5 percent five times (Statistics Canada 2021). According to our model in table 8.1, each of these instances would have triggered the 150 percent allocation of the previous year’s PST revenues for government spending. In the same twenty-six-year period, the province would have triggered a 100 percent allocation another five times, and a 50 percent allocation twice. It would have had a 0 percent allocation fourteen times. Any revenue from PST in those fourteen years would have, according to our model, been allocated to the PST reserve fund.

Table 8.3 gives us a small window into how the proposed stabilization framework might have worked in Alberta over a five-year period. It also shows how this type of framework might have impacted Alberta’s net debt. Like table 8.1, table 8.3 uses historical data about Alberta’s revenue and GDP to illustrate how this stabilization framework could work in the province and to make estimates about key outcomes of a 5 percent PST implemented using this structure. It is imperative to remember that these are rough estimates only; they are by no means exact calculations of the true impacts that this framework might have had.

Sources: Author’s calculations based on Government of Alberta (2020); Government of Alberta, “Gross Domestic Product,” Alberta Economics Dashboard, accessed 3 December 2021, https://economicdashboard.alberta.ca/grossdomesticproduct. The 5 percent PST revenue estimates are based on insights from Kenneth J. McKenzie, “Altering the Tax Mix in Alberta,” University of Calgary School of Public Policy Publications 12, no. 25 (2019): https://doi.org/10.11575/sppp.v12i0.68390.

Note: This table represents a rough estimate only. It does not present real-world calculations of PST that would be collected or how spending might have changed.

Table 8.3 suggests that the swings in the government’s annual deficit or surplus should be much smaller using an approach like the one I propose. This, combined with a lower net government debt level thanks to the PST reserve fund, could give financial markets greater comfort with Alberta’s fiscal situation, which may have the positive effect of lowering the province’s cost of borrowing. Operating under this model, the province’s PST reserve fund could also give rating agencies comfort that Alberta is better positioned to match revenues to spending through the entire economic cycle, ideally improving our credit rating and reducing the cost of debt. A lower cost of debt would result in less pressure on the government to increase tax increases for Albertans. It would also offset pressure to raise taxes or engage in dysfunctional spending cuts when the economy weakens. In those times (like 2015–16 and 2019–20 in the table 8.3), the government would have access to more revenue from the PST than they would be collecting during the year, effectively transferring funds from the good times when more revenue and spending is not necessary to the bad times when revenues have fallen well short of needs. Finally, table 8.3 illustrates how this fiscal stabilization is in part due to the enforcement of an objective spending discipline model: when Alberta’s annual revenues improve, as they did in 2017–18, the funds from PST are not available for spending; they are instead saved to even out deficits in other years.

A Disciplined PST for Alberta

The simplified examples I present in this chapter are far from complete or sufficient. Many details have not been contemplated—for example, the question of how to contain the temptation to raid the PST revenue fund; the timing when real GDP data becomes available each fiscal year; problems of revenue starvation when GDP rises from a very low level or stays for an extended period in recession; and the possibility of volatile revenue due to the large difference in amount of PST revenue for given GDP levels. It will take work to actually apply this type of framework, and that work will result in new insights not considered in this simplified presentation. The root concept, however, is the main point. In my experience as a financial manager who operated within a similar system (a credit union), I have found that cost discipline and decision making significantly improved when we applied this kind of approach to financial management. This, in turn, materially benefited the customer/owner. It has the same potential to benefit Albertans and their government. It will also increase government accountability, particularly in terms of tax increases in tough times. A government that seeks to increase taxes during a downturn is likely to face aggressive public debate of their fiscal management if people know that the PST they have been paying for years was intended to mitigate the need for such tax increases during recessions.

But again, if we wish to encourage a dialogue on what a PST could mean for Albertans, we first need to address the pervading distrust of new taxes based on the belief that increasing government tax revenue will simply lead to more ineffective and inefficient government. If we don’t credibly address this distrust, a sales tax for Alberta will remain a topic of “political suicide.” However, if government first demonstrates that it intends to implement a sales tax with a fiscal discipline structure that is designed to control the so-called institutional imperative and ultimately benefit the province and the taxpayer, it can build voter trust and ultimately make feasible a real conversation about sales tax in Alberta.

Notes

References