Alberta racking up debt much faster than Ontario did
Recently, several high-profile exchanges on social media and news stories have compared the economic pain in Alberta to what was experienced in Ontario during and after the 2008/09 financial crisis.
We won’t get into addressing the question of which province has/had it worse here; suffice to say they have both experienced recent economic pain.
However, with the advantage of hindsight it’s worth highlighting one of the consequences of government policy in the face of such a steep recession in Ontario—that consequence being a massive run-up in debt—and to show that early evidence suggests Alberta is headed down the very same path.
Ontario’s budget deficit peaked at just over $1,500 per person in 2009/10. That is, in short, a large gap between revenues and operating expenses in a single year. Alberta badly outdid Ontario in 2016/17, however, clocking a staggering deficit of $2,500 per person—the largest of any province other than Newfoundland since the fiscal consolidations of the 1990s.
In the years following the recession, the Government of Ontario began to exercise modest spending restraint (though did not take action to eliminate the deficit quickly), with the result being moderate progress on deficit reduction. For instance, in the year following its peak, Ontario’s deficit per person fell by nearly $500. In Alberta, the deficit in the year following the peak deficit year was almost exactly as large. Even now, Alberta has made almost no progress in terms of deficit reduction.
Some may blame weak oil prices for the sluggish pace of deficit-reduction in Alberta, but the reality is government choice has played a big role. Even as the economy started to recover and the debt piled up quickly, the government has shown no appetite to reduce the deficit by reining in spending. Indeed, Alberta’s spending growth rate has been among the highest rates in Canada in recent years.
With bigger peak deficits and a lower rate of deficit-reduction, Alberta is racking up debt much faster (adjusted for the size of the population) than Ontario did. This may come as a surprise to many who view Ontario as the poster boy for poor fiscal management over the past decade. But again, Alberta’s pace of debt accumulation has been faster than Ontario’s in the early years of this decade. As a result, Alberta’s per-person debt load is catching up to Ontario’s at a shocking rate.
Consider this. In 2014/15 Alberta had no net debt at all. That is, the province’s financial assets exceeded the value of its debt while Ontario’s debt was approximately 40 per cent as large as its economy.
Since then, Alberta has been catching up at warp speed. Indeed, forecasts suggest that by the end of next year, net debt in Alberta will reach $10,000 per person compared to just over $22,000 in Ontario. In other words, in just a half-decade, Alberta will go from having no net debt at all to having half as much debt per person as famously-indebted Ontario.
This is terrible news for Alberta taxpayers who have historically enjoyed a fiscal advantage from their low debt burden. While Ontario spends about nine per cent of all revenue collected on debt-service payments, that number is approximately three per cent in Alberta. This freed up billions of dollars that could be used for better things including public services and tax relief. As debt soars in Alberta and, especially if interest rates continue to rise, this fiscal advantage will continue to evaporate.
There’s no need to figure out who got hurt worse during their recent terrible recessions—things got bad in both places. However, there’s value in Alberta learning from Ontario’s history and trying to avoid some of the same negative outcomes related to its recession.
When it comes to deficits and debt accumulation, Ontario shows how a passive approach can lead to a rapid run-up in debt. Unfortunately, the evidence suggests Alberta is not only following Ontario’s trajectory, it’s actually racking it up even faster than Ontario did. Unless that changes soon, Alberta will soon join Ontario and Quebec as a high-debt province.