Alberta must hold the line on spending

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Appeared in the Calgary Sun, April 6, 2016

Alberta currently faces daunting fiscal challenges, including large annual deficits and mounting debt. Given the circumstances, next week’s budget must take decisive action to rein in spending and minimize the amount of debt the province will accumulate.

First, it’s important to understand just how quickly Alberta’s financial position is deteriorating. Consider that the projected deficit for the current year is $10.4 billion, up from $6.3 billion last year.

That adds up to a $16.7 billion operating deficit over just two years. As economist Ron Kneebone has noted, that’s almost as much as Alberta’s Heritage Fund (about $18 billion), a “nest egg” that took decades to build.

Despite these troubling numbers, it’s not too late for the provincial government to act to limit the pace of debt accumulation. If the government recognizes the severity of the problem and commits to genuine spending restraint, it can help protect Albertans from a rapid run-up in debt.

In its last budget, the government forecasted that in 2016/17 program spending will increase by 2.4 per cent. However, the province’s fiscal circumstances have worsened dramatically since then. In the current climate, proceeding with the planned 2.4 per cent spending increase would be irresponsible.

Indeed, the entire fiscal plan from last year’s budget, which calls for average annual spending growth of 2.3 per cent over the course of the government’s mandate, now seems disconnected from the province’s fiscal realities. But if the government is willing to adjust its plans to fit economic circumstances, it can substantially slow down the pace of debt accumulation.

For example, if over the rest of its mandate the government freezes program spending at 2015/16 levels, it will spend approximately $13 billion less than it currently expects between now and 2019/20. That means $13 billion less debt that will be passed along to young Albertans—about $3, 000 per person.

Zero spending growth may seem an ambitious goal until one considers the recent historical context. Program spending in Alberta has approximately doubled since 2004/05, with annual spending increases outstripping both economic growth and the effects of inflation and population growth. Given this sustained spending growth, an adjustment period of zero growth doesn’t appear at all impractical.

In fact, the government may well have scope to actually reduce provincial program spending in the years ahead. Consider the fact that recent research shows that public-sector workers in Alberta enjoy a 6.9 per cent wage premium, on average, compared to comparable workers in the private sector. And this wage premium comes atop of larger non-wage benefits including greater job security and pension benefits. With many collective bargaining agreements set to expire soon, there will be opportunities for the government to improve its fiscal situation by bringing public-sector wages and/or benefits closer into line with private-sector norms.

Some will counter it is unrealistic to expect an NDP government to deliver a spending freeze or spending reductions. This argument ignores Canadian history, which has examples of governments of all political stripes delivering needed spending reform during difficult times.

Consider neighbouring Saskatchewan’s experience in the early 1990s, when an NDP government took office during a fiscal crisis and immediately took action. Roy Romanow’s government reformed spending, leading to a reduction of approximately 10 per cent over three years, quickly eliminating the deficit. Similarly bold action is now needed from Romanow’s NDP cousins in Alberta.

Defenders of the current government often point out they didn’t create Alberta’s fiscal mess. This is largely true. It’s also irrelevant to the crucial question at hand: what is now to be done? Given the fiscal challenges facing Alberta, the need for decisive action to rein in spending is clear. It remains to be seen in next week’s budget whether the NDP government will rise to the occasion.

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