Fraser Forum

New report highlights Alberta’s long-term budget challenges

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A recent report by the Parliamentary Budget Office (PBO) examined the fiscal health of Canada’s provincial and federal governments. Specifically, it estimated the “fiscal gap,” which the authors defined as the amount that fiscal policy would need to be adjusted—through spending reductions or tax increases—to maintain each government’s net debt-to-GDP ratios. The report had sobering news for Alberta, which has the worst fiscal gap of any large province.

Alberta’s large fiscal gap requires significant fiscal policy changes if the government is going to stem the tide of red ink. The PBO estimates that the Government of Alberta would need to reduce spending (or increase tax revenue) by 4.6 per cent of provincial GDP to achieve “fiscal sustainability.” In concrete terms, they estimate this would require a 25 per cent increase in the tax burden or a 20 per cent program spending reduction. That level of spending reduction would be slightly less than what was achieved during the Klein government’s deficit elimination efforts.

Some might argue that increasing tax rates is the way to bridge this gap. However, the Notley government has already introduced a raft of tax increases, including a 50 per cent increase to the top personal income tax rate and a 20 per cent increase in the corporate tax rate. This approach is harmful to the province’s prospects for long-term economic growth. And the tax hikes haven’t prevented the government from running record-breaking deficits because the government hasn’t done anything to fix the underlying problem—rapid program spending increases.

This isn’t a new problem. Successive governments have rapidly increasd program spending for more than a decade. Program spending increased between 2004/05 and 2015/16 by nearly 100 per cent—almost twice the combined rate of inflation plus population growth. When the Notley government took over amidst a recession and significant decline in government revenue, there was an urgent need to re-evaluate the province’s spending trajectory after a period of enormous growth.

Unfortunately, the Notley government decided to double down on the failed approach of its predecessors and actually increased the rate of spending by 11 per cent over its first two years in office.

The PBO has given Alberta’s provincial government yet another warning that government spending is badly out of line with revenue, and that without policy change the province is likely to rack up substantial debt in the years ahead. The evidence shows that a sustained period of spending growth by many different governments is the reason Alberta faces this situation today. It’s long past time for the Notley government to strike at the root of Alberta’s fiscal challenges reforming and reducing provincial spending.