Alberta’s true deficit is larger than you think
While the headlines on Alberta’s recent budget focused on the planned $6.1 billion deficit this year, the reality is that the true deficit will be even larger. The reason relates to a critical distinction between an operating budget and a capital budget.
When we hear the government will incur a $6.1 billion deficit, it is referring to the operating budget—the difference between the annual revenue the government collects and the money it spends on day-to-day expenses such as the salaries and pensions of government employees. This number attracts most of the attention.
But when a government borrows to pay for capital spending (roads, schools, hospitals), it typically records only the annual interest payments and amortization expense in the operating budget. The capital budget is where the province borrows money to pay for its long-term infrastructure spending. While this accounting process helps spread the cost over many years, it can disguise the true state of provincial finances.
In the case of Alberta, the recent budget announced an ambitious $34 billion, five-year capital plan, representing a 15 per cent increase relative to the March budget. This plan means the government will add more debt to its books for capital projects than just the operating deficits announced in the budget.
The chart below compares the planned operating deficits in Alberta to the change in the government’s net financial position. Net financial position is a measure used by governments to track the net change in financial assets and debt on a regular basis. The data are for the period covered in the budget (2015/16 to 2017/18).
The chart shows that a large gap exists between the operating deficit and the change in net financial assets. For instance, in 2015/16 the operating deficit is $6.1 billion while the change in net financial position is $9.7 billion—a difference of 58 per cent. A key reason the net financial position of the province worsens by more than the announced $6.1 billion deficit is that capital spending is financed by debt. This gap between the operating deficit and deterioration in the net financial position of the province (again—the difference between financial assets held and debt owed) grows to 84 per cent by 2017/18.
Albertans must look beyond the headlines to understand what’s happening to their government’s finances. Further investigation reveals the true deficit is larger than what the headlines suggest.
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