Mounting government debt threatens Alberta’s fiscal status among provinces
Recently, RBC Economics published a report on provincial finances. The report, which is clear, concise and highly informative, estimates that all the provinces taken together will this year run a cumulative operating deficit of $63.1 billion. That’s a larger operating deficit than the last five years combined.
While the report has important insights on all 10 provinces, perhaps the most important forecasts relate to Alberta whose severe fiscal challenges have now gotten dramatically worse with oil-price drop, COVID and this steep recession.
Alberta is now forecasted to run a roughly $18 billion deficit this year. That would be, in nominal terms, by far the largest in provincial government history. Relative to the size of the economy, it would be the largest deficit since the mid-1980s.
Combined with a steep recession, this big deficit will cause Alberta’s debt-to-GDP ratio (economists’ preferred metric for indebtedness) to double, from 10 per cent to 20 per cent. It’s a shocking increase, especially when you consider that as recently as 2015/16 the province was still “debt free.”
Moreover, it seems the province will soon lose its status as the least indebted province in Canada (relative to the size of its economy). In fact, the RBC Economics forecast suggests Alberta will lose this distinction this year, overtaking Saskatchewan and British Columbia.
Of course, we live in uniquely unpredictable times, and as such all forecasts about this year should be taken with that fact in mind. Still, Alberta has lost its “debt-free” status and caught up to its two neighbours. In short, the province’s government finances are no longer anything special.
All of this would have been unthinkable a decade and a half ago. In fiscal year 2007, Alberta actually had a net financial asset position of $39 billion, which means the province actually held $39 billion more in financial assets (in the Heritage Trust Fund, for instance) than in debt.
The deterioration of Alberta’s fiscal position since then has been remarkable. Between 2007 and 2015, Alberta blew through its net assets. Since then, it’s been piling up debt, to the point that net debt this year will climb to about $55 billion. That’s almost a $100 billion decline in net assets in less than a decade and a half—a staggering figure for a province of more than four million residents.
The Kenney government is not responsible for the severe fiscal challenges now facing the province. It is, however, responsible for developing a credible solution to those challenges, which means stopping the bleeding of red ink and slowing the accumulation of debt to reduce the burden on future generations of Albertans.
Alberta will likely soon lose its status as the province with the strongest balance sheet in Canada. This should serve as another wakeup call for policymakers in Edmonton. When the COVID public health and economic crisis is over, the government must address the province’s fiscal challenges quickly and decisively.