The red-ink budgets that have engulfed Alberta since the last recession—Alberta’s Finance Minister Doug Horner just announced this year’s deficit could hit $4-billion— are not accidental. Such red ink is not just the result of weaker resource revenues, as Alberta Premier Alison Redford regularly claims.
Such an explanation ignores the other half of the ledger—the spending side. And here, the rest of Canada should watch Alberta’s budgetary fall closely as a cautionary tale. In particular, watch the kind of contract deals your government signs with the public sector because that’s where most tax dollars are spent.
Before detailing how Alberta has gone from ballooning surpluses to massive deficits in part due to spending, let’s examine the assertion that drops in revenue caused Alberta’s red ink. To do that, ponder Alberta’s most recent boom years, arguably in the middle part of the last decade.
Back in 2005/06, resource revenues flowing into Alberta’s provincial coffers hit a peak of $17.1 billion. As of the budget estimate for this current year (2012/13), such revenues will be $11.2 billion (all figures adjusted for inflation to 2012 dollars). That figure may sink lower if recent emanations from the provincial government are correct.
So did the decline in resource revenues affect the province’s ability to balance the budget? Yes.
But now turn to the other side of the ledger, the spending side. The public should know that much of what governments spend goes to programs (roughly 85 per cent in Alberta) and much of that is spent on public sector compensation.
Alberta does not estimate how much of its total budget ends up in the form of wages and benefits for the broad public sector. However, last year, the Ontario Commission on Reform of Public Finances said that half of Ontario’s budget is spent on wages and benefits in the overall public sector. It is reasonable to assume other provinces incur similar, proportionate costs.
So how has Alberta done on keeping program spending (and thus compensation costs) in check? Not very well.
Consider a comparison from 2005 forward, from the boom years. (At that point, per capita program spending was already significantly up from the mid-1990s lows.)
Back in 2005, the Alberta government spent $9,594 per person on programs. By the current year, that jumped to $10,526 per capita, an almost 10 per cent rise in real per capita terms (and again, adjusted for inflation).
What Alberta did over the past eight years was akin to someone who assumes a large Christmas bonus given in one or two years will reappear every year—and then buys an expensive house with permanently higher mortgage payments. That’s exactly what Alberta’s government did when it committed to ever-higher program spending in the boom years.
Now consider this simple question: How would Alberta’s finances look now, even with the revenue decline, if the province had increased program spending since 2005, but in line with inflation and population growth? Crunch those numbers and you find that Alberta spent an extra $22.1 billion beyond that parameter.
Had the province stuck to inflation plus population growth increases since 2005, Alberta would have enjoyed surplus budgets, including during the recession and in this present fiscal year. Instead, the province has recorded five straight deficits and is heading for its sixth deficit year.
Part of the problem has been generous collective agreements signed by the province that made governing Alberta expensive.
To cite just one example, in 2007, the province signed a five-year deal with the teachers’ union that provided for raises over that period that were double the rate of inflation. That happened even though Alberta’s teachers were already the best-paid in the country. The province also took over billions in unfunded liabilities in the Teachers’ Pension Plan that had previously been the responsibility of teachers. Those were both very generous gestures, and for all taxpayers, very costly deals.
Given that recessions and economic cycles will not magically disappear, it is inevitable that provincial revenues, in any province, will occasionally drop. The critical question is whether a government is prudent enough in advance to avoid overstretching itself on the program spending side of the ledger.
In Alberta’s case, the answer was “no.” Alberta’s red ink experience should serve as a warning to the rest of the country: Watch your collective agreements with the public sector. They can come back to haunt you.