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Rising debt interest costs further threaten Alberta finances

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Rising debt interest costs further threaten Alberta finances

The Kenney government’s 2021/2022 budget, which is unsurprisingly covered in red ink, forecasts an $18.2 billion deficit—by any measure, one of the largest in provincial history.

Over the next several years, the government’s plan for deficit-reduction is essentially to hold nominal spending flat (or close to flat) in major areas of government. This constitutes a reduction in inflation-adjusted per-person spending each year. The government hopes revenue growth over the life of its fiscal plan, which runs until 2023/24, will help shrink the deficit.

Over the three-year period, the government forecasts a nominal spending increase of 2.5 per cent for health care (the largest area of provincial spending) and 1.4 per cent for K-12 education. Spending on higher education and community and social services are actually forecasted to shrink in nominal terms.

There’s one key spending area, however, where spending is set to skyrocket—interest payments on provincial government debt.

In 2019/20, Alberta paid $2.2 billion in debt interest costs. By 2023/24, that number is forecasted to climb to $3.3 billion, an increase of approximately 50 per cent. The chart below shows the nominal change in spending in various areas of public management and debt costs between 2019 and 2023.

Alberta Expenses chart

For Alberta, $3.3 billion in debt interest costs is remarkable considering where the province was just a few years ago. In 2010, debt interest costs were a negligible $472 million, equal to only 1.2 per cent of provincial government revenues. Needless to say, that interest bite is growing larger by the year. According to Kenney government forecasts, by 2023/24, debt interest will consume 6.6 per cent of all provincial revenues.

Growing debt interest costs are partly why Alberta’s budget deficit is expected to remain stubbornly large in coming years. Again, according to government forecasts, by 2023/24 the deficit will be reduced to $8 billion including $3.3 billion in debt interest. In other words, if the government’s forecasts come to pass, debt interest costs will comprise 41.8 per cent of the deficit that year.

Indeed, while diverting funds from other better uses for Albertans, rising interest costs will also make it harder for future governments and finance ministers to balance their budgets. As Alberta’s forecast for the next few years shows, this can result in bigger deficits, more debt and—all else equal—more debt interest payments. It’s a vicious cycle.

None of this is to absolve the Kenney government of responsibility for restoring Alberta’s finances to sustainability. Governments can’t control all circumstances they inherit, but the Kenney government promised to chart a path back to budget balance. It should be held accountable for those commitments. If the Kenney government can balance the books, it will prevent even more debt accumulation and control rising debt interest payments, which are ultimately paid for by Albertans.

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