Alberta would be in surplus, not deficit, had the government restrained spending
When Finance Minister Joe Ceci unveils Alberta’s budget on Oct. 27, Albertans can expect a sizeable deficit. In fact, the government’s latest data suggest a $5.9 billion deficit, but Minister Ceci has cautioned it could be “in the range of $6.5 billion.” In either case, the amount isn’t trivial.
A popular narrative holds that the recent fall in oil prices is chiefly responsible for the province’s current deficit and the risk of shortly becoming a debtor province again. The evidence does not support this view. The real reason Alberta faces a large deficit is rapid spending growth over the past decade. In other words, the provincial government has been unable to restrict growth in spending during good times—understanding that good times don’t last forever.
Not long ago, Alberta’s public finances were the envy of the federation. Important fiscal reforms during the 1990s eliminated the deficit and created the fiscal room needed to establish a competitive tax regime that would lay the foundation for robust economic growth. Indeed, the “Alberta Advantage” became the cornerstone of the province’s prosperity.
But that advantage has disappeared and Alberta is no longer the fiscal leader it once was.
The province has run deficits in seven of the last eight years and its financial position has eroded with net assets (a measure of assets adjusted for debt) falling from a high of $35 billion in 2007/08 to an expected $3.9 billion this year. Alberta is now at risk of returning to a net debt position (where the total value of government debt exceeds financial assets) for the first time in more than 15 years.
Contrary to the popular narrative, declining oil prices and resource revenues aren’t to blame. Alberta has run recent deficits when oil prices exceeded $90 per barrel. Even with oil at around $50 per barrel today, the price is still higher (after adjusting for inflation) than prices in the 1990s when the government eliminated a large deficit and began a string 14 consecutive budget surpluses.
In reality, rapid spending growth over the past decade, rather than declining oil prices, is the source of Alberta’s current deficit and fiscal woes more generally.
Consider that between 2004/05 and 2014/15, the provincial government increased program spending by 98.3 per cent—nearly double the growth rate necessary to keep pace with increasing overall prices (inflation) and a growing population, which collectively grew by 52.1 per cent over the period. Program spending also outpaced the rate of provincial economic growth (88.6 per cent).
Now consider a situation where the provincial government had been more fiscally prudent. Had the government limited program spending increases since 2004/05 to keep pace with inflation and population growth, the province would enjoy an estimated surplus of $4.4 billion this year instead of the projected $5.9 billion deficit—a difference of $10.3 billion.
Alternatively, had the government limited spending increases more modestly, to the growth rate of the provincial economy, Alberta would still enjoy a $1.9 billion surplus.
While it’s tempting to lay the blame on declining revenues, it’s important to underscore that provincial revenues are expected to be approximately $6 billion (or 15.7 per cent) higher this year than their pre-recession level in 2007/08. That’s hardly the precipitous decline one might expect given the narrative that falling resource revenue is responsible for Alberta’s deficits. These deficits are primarily the result of spending choices, not extenuating circumstances.
Put simply, Alberta’s current fiscal predicament stems from successive governments being unable to control spending. Blaming external forces distracts from the choices that have led multiple provincial governments down the path of persistent deficits.
The key lesson is to spend prudently in good times in order to be prepared for the bad times.
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