The worst might be over for Alberta’s economy, but not for government finances
Albertans got some welcome news recently, when ATB Financial suggested that the worst of the oil price downturn is over and that oil prices would continue to increase in 2017.
This is, of course, encouraging for Alberta’s economic outlook. However, it’s important to recognize that while an increase in oil prices, and a return to economic growth, would help Albertans suffering from the province's current economic malaise, it’s unlikely to solve the provincial government’s budget problems. Specifically, unless the province reforms and reduces provincial spending, Alberta’s big deficits will likely persist for years—even if oil prices increase.
Oil prices were never the whole story behind Alberta’s budget problems. The reality is that before the oil price crash, successive governments increased spending at unsustainable rates. Remember, Alberta ran seven deficits in the past eight fiscal years, but during that stretch, oil prices averaged $88 per barrel. Clearly, Alberta’s fiscal challenges pre-date the fall in oil prices.
Even now with lower oil prices, the provincial budget would be in much better shape if the province managed spending more prudently. In fact, if the province had simply held per person spending increases to the rate of inflation since 2004/05, we would just now be coming off a long string of surpluses and the deficit this year would be approximately one-tenth as large.
Again, because low oil prices aren’t the primary cause of Alberta’s fiscal mess, it would be a mistake to simply count on rising oil prices to bail us out. In fact, even if total royalty revenue this year magically returned to levels seen during the height of the energy boom, Alberta would still be on track to run a deficit. While an oil price recovery would help the provincial economy, it is unlikely to be enough to quickly close the budget gap.
The way to address Alberta’s fiscal problems is to strike at their root—undisciplined spending. Unfortunately, the provincial government has maintained the spending habits that got the province into trouble.
For example, upon taking office, the government immediately increased spending by $624 million, despite the looming deficit, and is projected to further increase program spending at an average rate of 3.9 per cent over the next three fiscal years, well above the 2.9 per cent required to account for inflation and population growth. New government, same old approach.
Instead of recognizing the source of the problem and reining in spending, the government raised taxes and crossed its fingers while hoping for rising oil prices to take care of the deficit for them.
The projection of further increases in the price of oil is good news for Alberta’s economy, but the provincial government should not view it as evidence that oil prices will solve its fiscal problems. Instead, the government in Edmonton should focus on matters within its control by addressing Alberta’s spending problem. Otherwise, it will likely be a long time before Albertans see a balanced budget again.
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