Alberta's 1980s-style fiscal karma is back

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Appeared in the Calgary Herald and Edmonton Journal

Those who don't believe in reincarnation might wish to reconsider, as Alberta provides useful examples of those trapped in bad karma from decades past "fiscal karma" in this case.

In an eerie repeat of the 1980s and early 1990s, Alberta's current political leaders have trod the same red-ink paths as did Alberta Premier Don Getty and his colleagues.

Some context: In inflation-adjusted U.S. dollars, a barrel of oil, which traded as high as $92 in 1981, declined steadily over the next few years to reach $56 by 1985 (Getty's first year as premier). It then dropped in half, to an annual average of $28 per barrel in 1986.

The result was a steep decline in Alberta's resource revenues by the 1987 budget year (i.e., that ended March 31) when compared with the year previous.

But that revenue drop wasn't the only reason for Alberta's 1980s-era deficits; they were preceded by significant spending increases. Such extra spending had long outpaced revenue growth throughout the first half of the 1980s.

The red ink was accompanied by excuses. In late 1988, after three deficit years and a fourth in progress (note the parallel to the present), Calgary Herald columnist Don Braid wrote of how then-Premier Don Getty argued with reporters that Alberta was really debt- free, if one totaled up the province's assets and liabilities.  

Sound familiar? In April 2009, Premier Ed Stelmach rejected a University of Calgary report by economists Herb Emery and Ronald Kneebone. Their study warned the province faced a 1980s-style quagmire in public finances. Stelmach called it "nonsense" and responded with a defence straight out of Getty's playbook: Look at our balance sheet. We're the only jurisdiction in North America that has cash in the bank (liquid).

The Getty-Stelmach point was/is technically correct. But the assertion ignores a crucial point: the direction. Run deficits long enough and there goes the boast about having net assets.  And that's exactly what happened between the 1980s and 1990s.

In 1985, Alberta had $12.6 billion in net financial assets. Nine consecutive deficits turned that into a net debt position of $8.3 billion by 1994. That was a $20.9 billion swing over nine years (in nominal terms).

And that's another karmic parallel: According to Budget 2011, between fiscal 2008 and with a forecast to 2013, Alberta's financial assets will again decline, and by almost a similar amount as before - $20 billion in nominal terms.

The pattern is clear: Alberta is rapidly drawing down its savings as it did in the 1980s and early 1990s.

The 1980s/1990s decline in Alberta's fiscal fortunes was the result of politicians who didn't face the fact that boom-time energy prices would not soon return, nor the accompanying boom-time tax revenues.

So they first tried everything else to balance the books. Alberta's political leaders reduced and then entirely stopped resource revenue transfers to the Alberta Heritage Savings Trust Fund; then they re-directed the fund's earnings to general revenues; and in the 1987 budget, taxes were raised by $1 billion, about a 12 per cent tax hike overall.  

Still, akin to Bill Murray's character in Groundhog Day, who woke up only to repeat the same day every day, red-ink budgets were the norm under Premier Getty's government.

The core of the problem was a spending pattern built up in the early 1980s and which had not yet been corrected.  

For example, in a comparison of the 1981 and 1986 fiscal years, program spending was 85 per cent higher in that latter year (the first deficit year) when compared to 1981. In contrast, revenues were only 49 per cent higher.

Similarly, in the five years before the newest deficit era, a similar pattern played out. In a comparison of 2004 and 2009 fiscal years, program spending was 70 per cent higher in that latter year (the first deficit year) when compared to 2004. In contrast, revenues were 38 per cent higher.

When spending increases continually run ahead of revenue growth for half a decade, inevitably, budgets will bust and end up in red ink. It is akin to increasing personal spending every year beyond one's wage increases.  That was the lesson of the 1980s, learned late and hard with spending cuts post-1993.

That lesson has now been forgotten. In the past 25 years, real (inflation-adjusted) per capita program spending hit a high of $11,496 in 1986; it was cut to a low of $6,498 by 1997. However, as of the last budget year, it is now significantly higher again at $10,204 per capita.

Currently, the tough spending decisions have yet to be made. Problematically, that only makes the choices down the road even more troublesome.

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