Alberta NDP Provincial 2015 Budget: Thoughts?

[Matt Crowley]

Just wondering about some investor opinions on the NDP provincial budget released yesterday (Budget details Alberta Government website).

A few of my thoughts:

• Positive to be investing into infrastructure: we are entering into a slower economy and its a much better time for government projects. Government developing during stronger economic times increases prices for private developers and erodes profit and reduces capacity. It also over-builds an industry doomed to bust
• Long term care facilities and seniors: glad to see more investment here
• $5,000 job grant for new employment hires (up to 10% of annual wage): not a good idea. Employers hire when they need workers. This probably isn't much of an incentive for larger employers and hasn't really enhanced the competitive marketplace in any way. Corporate tax rate is up to 12% but they are handing out $5,000 grants? This is just a PR piece. Private business is a lot more efficient in making these decisions than by government mandate, in my opinion.
• Wine / alcohol and cigarette tax: obvious easy targets. I think a PST would have been a lot easier and cheaper to implement. These taxes are still drop in the bucket
• Exhausting the contingency fund
• Negative: no budget for affordable housing. Fully allocated to senior's housing.
• Troubling: we have a $14.8 billion operational deficit over the next 4 years (the Liberals federal party suggested ~$10 billion deficit over the next 4 years to see the scale here). I love investing in infrastructure. That operational deficit will grow another ~$2 billion if oil remains at a depressed level.

Anyways, I would be interested in hearing your thoughts...and what kind of impact you foresee for your portfolio!

 

[Sherilynn]

My thoughts on the budget? "ARGH!"

I think every country would be financially healthier if governments and citizens alike didn't spend more than they make.

It is the entitlement mentality on steroids: "we want to spend $14 billion on infrastructure on care facilities now, so we're going to do it whether or not the province can afford it...we'll simply run a deficit and incur the interest" sounds a lot like "I want this 65-inch LED TV now but I don't have the cash, so I'm going to put in on my credit card and simply make the minimum payments so it stays affordable for me."

What is worse is that buying on credit becomes a habit, because it is so easy to do and the consequences are so abstract. (Remember the debt racking up in Canada in the 70's and beyond.)

 

[Thomas Beyer]

Alberta is now run by a group that is comprised of financially illiterate, inexperienced & timid politicians catering to handout seekers & unions. They wish to not rock the public sector salary nor tax boat. They see what happened in Ontario after years of scandals and overspending : re-election !

With the two right parties split NDP will possibly rule for more than four years after drowning this province in debt with no PST to add revenue.

They should adopt Texas approach to taxation and would look like geniuses: no provincial income taxes but triple the property taxes and 8% state consumption tax. Tax spending & consumption not incomes !! That debate needs to happen in Alberta an in Canada, especially in affluent immigrant and non-resident real estate hungry Vancouver & GTA, as many of them gorge on real estate yet pay no income taxes, but consume services such as policing, healthcare or education/ESL.

Debt has no immediate negative impact, in fact is stimulus for a few years, but having debt for operational expenses, as opposed to new highways, hospitals or schools should be illegal. Public sector wages ought to be trimmed 10-40%, depending on position in a lower salary oil & gas environment with plenty of labour around and still moving to Alberta. Public sector workers are making out like bandits: http://www.cfib-fcei.ca/english/article/7290-public-sector-workers-oped.html

It makes sense to spend money when construction labour is cheaper and not competing with high wage oil&gas jobs. David Dodge report is correct in that sense, and will take the edge off Alberta's rising unemployment in the construction sector.

Missing is a PST or other major revenue items such as land transfer taxes or property taxes.

Alberta is now grossly mismanaged, but will be OK in time as it is a major resource producer of almost 4M barrel of oil a day. 2016 will be far worse than 2015. Light on the horizon for 2017, assuming spending is in full tilt by then and oil up to $65+. As such, 2016 is a good time to buy real estate again, as prices & rents will continue to fall, say 10% or more in Calgary and other oil dependent towns (GP, Cold Lake, Fort McMurray, Edson, etc.) , and be flattish in more diversified Edmonton to 2016. Up from there.

The Alberta advantage is gone though. The question is: where is a better environment to invest ?

 

[Thomas Beyer]

What is worse is that buying on credit becomes a habit, because it is so easy to do and the consequences are so abstract. (Remember the debt racking up in Canada in the 70's and beyond.)

Depends on what is acquired with debt. Debt for infrastructure such as new highways, LRTs, schools or hospitals is generally good investment, whereas debt for operational expenses is bad. The example is more like: I use my LOC to add a second floor to my house or improve the kitchen, which is usually a good investment. As such, it makes sense to borrow now as debt is cheap and labour too.

What makes no sense whatsoever is to raise public sector salaries and to not even mention the word PST. Alberta needs a PST or other revenue sources, such as property related (tax capital gains, land transfer or ownership) like in well run booming Texas.

 

[Matt Crowley]

The Alberta Urban Municipalities Association put together a really nice summary of the NDP budget:

http://auma.ca/sites/default/files/...rary/2015_provincial_budget_version_final.pdf

Details on the Capital Plan (pages 7-8) are of particular interest to me, and probably for the Alberta investor as well. Personally, I like the Capital Plan. I think it would set Alberta back if we were not to invest into infrastructure projects in a low economic time with low interest rates. I think the budget bodes well for infrastructure.

Thanks for your responses Sherilynn and Thomas!

 

[Sherilynn]

Depends on what is acquired with debt. Debt for infrastructure such as new highways, LRTs, schools or hospitals is generally good investment, whereas debt for operational expenses is bad. The example is more like: I use my LOC to add a second floor to my house or improve the kitchen, which is usually a good investment. As such, it makes sense to borrow now as debt is cheap and labour too.

What makes no sense whatsoever is to raise public sector salaries and to not even mention the word PST. Alberta needs a PST or other revenue sources, such as property related (tax capital gains, land transfer or ownership) like in well run booming Texas.

I agree debt for the purposes of investment is a good idea when used responsibly. Sadly, most governments use debt about as responsibly as a 16-year-old would use a BestBuy credit card.

 

[Sherilynn]

Tax spending & consumption not incomes !! That debate needs to happen in Alberta an in Canada, especially in affluent immigrant and non-resident real estate hungry Vancouver & GTA, as many of them gorge on real estate yet pay no income taxes, but consume services such as policing, healthcare or education/ESL.

I completely agree with taxing consumption rather than income. However would rather see more luxury tax and sin tax than across the board sales tax. And please - no land transfer tax!
Non-resident real estate taxes sound like a great idea. The same problem has occurred in New Zealand for years. Thousands of acres of coastal farmland have been bought by foreigners, driving up the price of land to the point almost no Kiwi can afford it. (Plus there is a shortage of farmland in a largely agricultural society.) NZ finally started restricting such purchases several years ago.

 

[Matt Crowley]

The Alberta advantage is gone though. The question is: where is a better environment to invest ?

The across-the-board "advantage on average" is certainly declining....bottom is still to come.

Wages fall in Alberta..again (but, we still remain 14% higher than second place NFL and Labrador)

http://us7.campaign-archive1.com/?u=e425b7083c1526d250de3c060&id=7d0f146953&e=98a38a531f

 

[Thomas Beyer]

The bloom is certainly off and we will head down below the 2011-2014 boom-boom years in terms of wages and unemployment, but still quite healthy overall compared to the rest of Canada. Re-calibration back to the mean (of course not for public sector wages, which always always go up up up even as others suffer). Keep some significant powder dry for increased vacancies and falling rents, and for buying opportunities in 2016.

 

[MonicaPaslawski]

I really fail to understand the vehement opposition to a PST in Alberta. A sales tax makes sense on so many levels - stable revenue source, totally fair - generally the wealthier people will pay more, which seems to be the desired outcome by parties such as the NDP - although I must say that it is possible that wealthier people actually spend less on unnessary consumer items than middle class - which could explain why they are wealthier.

 

[LAndersen]

I really fail to understand the vehement opposition to a PST in Alberta. A sales tax makes sense on so many levels - stable revenue source, totally fair - generally the wealthier people will pay more, which seems to be the desired outcome by parties such as the NDP - although I must say that it is possible that wealthier people actually spend less on unnessary consumer items than middle class - which could explain why they are wealthier.

I think it is rooted in a few things. One big thing is an opposition to paying any extra taxes. What is needed is a good informed discussion with taxpayers in Alberta abotu why we are doing this. I think many people don't understand how this might work or don't even know some of us are discussing it. People don't realize that this is what is really needed either.

 

[Thomas Beyer]

I really fail to understand the vehement opposition to a PST in Alberta. A sales tax makes sense on so many levels - stable revenue source, totally fair - generally the wealthier people will pay more, which seems to be the desired outcome by parties such as the NDP - although I must say that it is possible that wealthier people actually spend less on unnessary consumer items than middle class - which could explain why they are wealthier.

Indeed the inept ruling party failed to implement it, or even mention a PST. They also failed to implement any reduction in the excessive public sector salaries, in fact increased them and their already bloated budget. Why govern prudently if one can borrow ?

Related right-on-the-mark commentary here: http://business.financialpost.com/fp-comment/peter-foster-the-alberta-disadvantage

Keep in mind that the NDP was not elected, but the PC de-elected and the 57%+ right of NDP vote split among 3 parties, and they slipped in.

The Alberta advantage is gone gone GONE until 2019 or until we see a meaningful oil price recovery. Rents and real estate values will be flat at best ( in Edmonton region ) to falling until 2017 everywhere else. Proceed with extreme caution. Plenty of foreclosed properties will emerge on 2016. Plenty!

Perhaps REIN will come out with a report entitled s.th. like "investing in an inept government environment" or "where does the Alberta opportunity still lie" or "Why invest in Alberta before 2019".

Investing along new transportation corridors (LRT or highways/bridges) or new buildings (ICE district) or new or expanded hospitals or universities will continue to make sense, or after a meaningful downward correction in many places late 2016 into 2017.

From the crowsnest, watching for icebergs !

 

[toronto430]

I really fail to understand the vehement opposition to a PST in Alberta. A sales tax makes sense on so many levels - stable revenue source, totally fair - generally the wealthier people will pay more, which seems to be the desired outcome by parties such as the NDP - although I must say that it is possible that wealthier people actually spend less on unnessary consumer items than middle class - which could explain why they are wealthier.

Actually, sales tax as a form of taxation is considered regressive (not progressive). While the "rich" consume more and pay more sales tax in total, they would pay the same amount of sales tax on the purchase of a new car as anyone else. As a percentage of income, sales tax works out to be cheaper than an income tax surcharge for the "rich".

 

[MonicaPaslawski]

Actually, sales tax as a form of taxation is considered regressive (not progressive). While the "rich" consume more and pay more sales tax in total, they would pay the same amount of sales tax on the purchase of a new car as anyone else. As a percentage of income, sales tax works out to be cheaper than an income tax surcharge for the "rich".

Yep - totally agree - with your fact on the car purchase - and I totally disagree with the idea that so-called "progressive" taxation is neccesarily the best for our economy, and for people. I particularily like a sales tax (commonly termed "regressive"), because no matter what income bracket I am in - it is to a large degree a tax I can choose not to pay by my own behaviour. Leaves me with some personal freedom - to me - that's not "regressive" at all.