Alberta’s finances—back to the ’90s?
During the early 1990s, the federal government and many provinces faced fiscal challenges so daunting that many described the situation as a crisis.
As governments across the country run historically large deficits in response to the COVID-19 pandemic and recession, many Canadians worry that the country may be on the road to a similar crisis.
Many of these concerns are reasonable, particularly if we focus on the provincial level of government. In fact, the fiscal challenges in many provinces today are beginning to closely resemble the size and scope of those faced in the early ’90s.
Consider the situation in Alberta. This year’s forecasted budget deficit of $21.3 billion is markedly larger (relative to the size of the economy) than any year in the 1990s. This year’s deficit is projected to be 6.9 per cent of GDP (the largest in the 1990s was 4.3 per cent in 1992/93). Of course, this is an extraordinary year, but Alberta expects a $15.5 billion budget deficit next year and a $9.9 billion deficit the year after that (the province ran sizeable deficits pre-COVID too). It’s fair to say the size of current deficits are roughly as bad or perhaps a little worse than in the ’90s.
Of course, budget deficits add up over time and contribute to the growth of provincial debt. On this metric, Alberta is in much worse shape today than in the 1990s. The province’s debt-to-GDP ratio peaked at 16.1 per cent in 1993/94. This year it will be much bigger, at a forecasted 20.6 per cent of GDP. With big deficits expected in the next two years as well, this figure is forecasted to increase.
Of course, the size of a government’s debt burden is just one measure of the scale of its challenges. The interest the government pays on its debt is another important factor and it will drive the extent to which debt interest payments bite into the provincial budget, which leaves fewer resources available for other priorities.
On this metric, the news is better relative to the 1990s—but only by a bit. The recent and current period of rapid borrowing has taken place during a period of historically low interest rates, which has kept the cost of borrowing down. But on this metric, Alberta’s situation is deteriorating quickly and may soon become as severe as it was in the 1990s.
During the 1990s, at its peak, debt interest payments in Alberta consumed nearly 11 per cent of all provincial government revenue. Followed by the fiscal reductions of the 1990s, Alberta’s net debt was eliminated and so too, essentially, were debt interest payments, which were just approximately 0.53 per cent of all revenues in 2008/09.
However, with big deficits and rapid debt accumulation, interest payments (as a share of government revenue) are increasing quickly, will reach 5.83 per cent this year and an expected 6.22 per cent by the end of the Kenney government’s current fiscal plan in 2022/23. All else equal, if Alberta keeps running large budget deficits, this metric will continue to worsen in subsequent years. Although Alberta’s condition is not as bad as in the early 1990s for this metric, if the province continues to run deficits similar to those it ran pre-COVID, things could get worse.
For all these reasons, Alberta’s finances are currently considered unsustainable according to multiple independent analyses.
Compared to the 1990s, today’s budget deficits are larger, the debt-to-GDP ratio is higher, and interest payments (as a share of government revenue) are lower but catching up quickly. This analysis suggests that comparisons to the ’90s with respect to Alberta’s finances are not hyperbolic and that this historical example can help inform how the Kenney government and any potential successors address the serious fiscal problems facing the province.
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