Last week, the Alberta government received its third credit upgrade in less than a year. In response, Finance Minister Nate Horner said “Alberta is in a pretty enviable economic position.”
But is that true? While the government deserves credit for paying off debt during this current boom in resource revenue, it remains at risk of returning to deficit when relatively high resource revenues (e.g. natural gas and oil royalties) inevitably decline. To avoid this fate, the Smith government must show real spending restraint.
To be clear, Premier Smith has signalled there would be a new approach to provincial finances that relies less heavily on resource revenue, which includes restraining spending levels below the rate of inflation and population growth. But crucially, Albertans should view this “restraint” within the context of the Smith government’s spending increases thus far.
Indeed, according to the Smith government’s latest budget tabled in February, inflation-adjusted per-person program spending is projected to decline annually over the next three years. But compared to the Smith government’s 2022 mid-year plan (Danielle Smith’s first fiscal plan as premier), the government will spend (inflation-adjusted) $1,326 more per person in 2023/24, $1,603 more in 2024/25, $1,571 more in 2025/26 and $1,538 more in 2026/27. In total, the Smith government plans to spend $6,037 more per person over four fiscal years compared to its 2022 mid-year plan.
On aggregate, the government plans to spend $6.1 billion more in 2023/24, $7.8 billion more in 2024/25, $8.0 billion more in 2025/26 and $8.2 billion more in 2026/27. In other words, the Smith government expects to spend $30.0 billion more over four fiscal years than it planned just a few years ago.
Put simply, the Smith government’s current plan for spending restraint will be less effective in stabilizing provincial finances due to significant increases since the 2022 mid-year plan.
So, what level of spending restraint is actually needed?
The key to stabilizing provincial finances is to align government spending more closely with stable ongoing government revenue, rather than temporary windfalls of resource revenue. Over the last two decades, the Alberta government received an average of $9.9 billion in resource revenue per year. –that’s a safe approximation of stable resource revenue in coming years.
If the Smith government aligned spending with this number, it would need to reduce its currently planned program spending by 10.1 per cent in 2024/25, 8.7 per cent in 2025/26, and 6.8 per cent in 2026/27. Notably, however, if the Smith government simply held to its original plan in the 2022 mid-year plan, spending would be even lower than these reductions. That means Alberta would be better positioned to avoid future deficits, and correspondingly, Albertans would avoid more government debt accumulation—which they finance with their tax dollars—in the future. Indeed, according to the government’s projections, from 2024/25 to 2026/27, debt interest costs will range from $3.1 billion to $3.4 billion annually.
Another credit upgrade is good news for Alberta. But due to significant spending increases thus far, if the Smith government truly wants to align spending with ongoing stable levels of revenue, it must reduce spending further than currently planned. Otherwise, Alberta will likely see more red ink in years to come.
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Alberta’s credit upgrade belies risk of red ink on the horizon
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Last week, the Alberta government received its third credit upgrade in less than a year. In response, Finance Minister Nate Horner said “Alberta is in a pretty enviable economic position.”
But is that true? While the government deserves credit for paying off debt during this current boom in resource revenue, it remains at risk of returning to deficit when relatively high resource revenues (e.g. natural gas and oil royalties) inevitably decline. To avoid this fate, the Smith government must show real spending restraint.
To be clear, Premier Smith has signalled there would be a new approach to provincial finances that relies less heavily on resource revenue, which includes restraining spending levels below the rate of inflation and population growth. But crucially, Albertans should view this “restraint” within the context of the Smith government’s spending increases thus far.
Indeed, according to the Smith government’s latest budget tabled in February, inflation-adjusted per-person program spending is projected to decline annually over the next three years. But compared to the Smith government’s 2022 mid-year plan (Danielle Smith’s first fiscal plan as premier), the government will spend (inflation-adjusted) $1,326 more per person in 2023/24, $1,603 more in 2024/25, $1,571 more in 2025/26 and $1,538 more in 2026/27. In total, the Smith government plans to spend $6,037 more per person over four fiscal years compared to its 2022 mid-year plan.
On aggregate, the government plans to spend $6.1 billion more in 2023/24, $7.8 billion more in 2024/25, $8.0 billion more in 2025/26 and $8.2 billion more in 2026/27. In other words, the Smith government expects to spend $30.0 billion more over four fiscal years than it planned just a few years ago.
Put simply, the Smith government’s current plan for spending restraint will be less effective in stabilizing provincial finances due to significant increases since the 2022 mid-year plan.
So, what level of spending restraint is actually needed?
The key to stabilizing provincial finances is to align government spending more closely with stable ongoing government revenue, rather than temporary windfalls of resource revenue. Over the last two decades, the Alberta government received an average of $9.9 billion in resource revenue per year. –that’s a safe approximation of stable resource revenue in coming years.
If the Smith government aligned spending with this number, it would need to reduce its currently planned program spending by 10.1 per cent in 2024/25, 8.7 per cent in 2025/26, and 6.8 per cent in 2026/27. Notably, however, if the Smith government simply held to its original plan in the 2022 mid-year plan, spending would be even lower than these reductions. That means Alberta would be better positioned to avoid future deficits, and correspondingly, Albertans would avoid more government debt accumulation—which they finance with their tax dollars—in the future. Indeed, according to the government’s projections, from 2024/25 to 2026/27, debt interest costs will range from $3.1 billion to $3.4 billion annually.
Another credit upgrade is good news for Alberta. But due to significant spending increases thus far, if the Smith government truly wants to align spending with ongoing stable levels of revenue, it must reduce spending further than currently planned. Otherwise, Alberta will likely see more red ink in years to come.
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Tegan Hill
Director, Alberta Policy, Fraser Institute
Milagros Palacios
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