December 2004: Good Debt, Bad Debt

Alberta is not "debt-free" when foreigners own its resources
December 1, 2004

When the Premier of Alberta announced a few months ago that his province was now “debt-free,” the national media gave the story up-beat coverage. It was as if the Alberta government had given up the demon debt for all time. But the announcement—and the way it was presented in the media—fail the credibility test, for a number of reasons.

First, as all know, Alberta is home to the Canadian petroleum industry, and it matters for the provincial balance-sheet that over half of the oil and gas resources are in the hands of foreign owners. Foreign capital registers as a liability in the external accounts because we owe the foreign owners profits, dividends, management fees, and other charges, forever. This foreign debt got overlooked in Ralph Klein’s press release.

The absentee landlords who control the birthright of Albertans (and the basis for Alberta’s standard of living) must be exceedingly pleased when it goes unrecognized in the “debt-free” announcement that Albertans will be making payments to them for all time. The Alberta government can only hope its citizens will not find out how foreign ownership of Alberta resources creates an obligation to pay for what, under the Constitution of Canada, belongs to Albertans. If Klein had announced in his press conference that, because of foreign debt, petroleum profits are going largely to foreign owners, not to the citizens of the province who supposedly own the resource, most Albertans would not have been so quick to celebrate being “debt-free.”

At a minimum, it would have been good news to hear from the Alberta government that the foreign owners of Alberta resources—most of them Americans—were now going to be taxed at the same average rate as they were being taxed in the rest of the world, instead of the absurdly low rate they currently pay in Alberta.

Second, government debt is an asset for those that hold it. Having wealth means being able to buy bonds and collect interest on them. Despite what the Alberta government hopes you believe, debt is not always a burden, and certainly not for those who hold the bonds. When you put savings into Government of Alberta bonds, you are making an investment. Public debt is a form of wealth. It is considered safe to invest in government bonds issued in Canada, which are a better risk than private debt, as shown by lower rates of interest on government borrowings.

Albertans would be advantaged if they were able to invest in new issues of Alberta Savings Bonds, or other forms of public debt, rather than putting their assets into money market funds sold by mutual fund companies. These Bay Street-based operations regularly charge, every year, a management fee greater than 50% of the rate of the return of the fund. It would be smarter to pay a sales commission on the purchase of the savings bond once (it need not be more than one-half of a percentage point) rather than have to give back every year, in fees, one-half or more of all the interest income received. The province of Alberta could pay, say, 5% on its bonds to savers. Since the interest is taxable, the net cost to the province would be less.

Third, the money raised with public debt can be invested in health care, child care, recreation, amateur sport, environmental protection, food security, public transit, cultural products, and other public services. With its wealth-creating capacity in oil and gas, Alberta should be one of the wealthiest—if not the wealthiest— jurisdictions in the world, or, for that matter, in the history of the world. Alberta should have the best-equipped, best-built, and best-staffed schools, universities, hospitals, sports facilities, and cultural institutions anywhere. The reason it doesn’t is because the necessary public investments have not been made to create public wealth. Albertans should not be fooled into thinking public debt is bad. If Alberta had more government debt instead of being “debt-free,” it would be able to finance the public investments its citizens need.

Fourth, the real cost of not making new public investments exceeds the cost of making sound private investments. For instance, forgone spending on children and youth is paid for in future hospital costs, unemployment later in life, family breakdown, and lower lifetime incomes. Governments that neglect to protect the environment by investing today in industry regulation and green education will pay more tomorrow to clean up polluted rivers and toxic dumps, and to care for people suffering from environmentally-caused illnesses. Inadequate provision of resources for home care means paying for more expensive hospital treatment.   

Fifth, the idea of a debt-free Alberta is absurd to the unemployed worker who can no longer make house and car payments, and faces the prospect of turning over the house and car keys to the bank. What does “debt-free” mean to the student who leaves college or university carrying a debt burden equivalent to a mortgage, before he or she can find a job, let alone buy a house or car? While consumers pay exorbitant interest on credit card debt, banks increase service charges and make more outrageous profits. Active government polices could turn around adverse circumstances for citizens. Promoting employment, reducing tuition fees, and protecting consumers of financial services are worthy objectives for any government.

Alberta has the resources to build a just society in which no one is left behind and everyone benefits from access to the best services in the world. But the reality of public finance under the Conservative government of Ralph Klein has been obscured by its rhetoric. It goes on pretending that the future belongs to those who are debt-free, but its petroleum royalties scheme is akin to giving away the natural resources that belong to Albertans. The Klein government reduces income tax rates paid by the wealthy, in the name of “one tax for all,” while sick people wait for needed operations.

Every citizen is capable of understanding the logic of investing today and benefiting for years to come. But it takes a major media campaign, complete with a press conference by the premier, to persuade people that less public services is good for the health of Alberta. Since this is obviously not the case, who does benefit from inferior public services?  

The real meaning of “debt-free” is an unfair society built on private sector services enjoyed by those who can afford the fees charged for them—not a just society with public services available to all, financed by taxes based on ability to pay and low-cost government borrowing.

(Duncan Cameron is a CCPA Research Associate and former President of the CCPA. He is a graduate of the University of Alberta.)