Smith government must begin new era of spending restraint in Alberta

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Appeared in the Calgary Sun, December 14, 2022
Smith government must begin new era of spending restraint in Alberta

In recent weeks, much commentary has focused on the supposedly rosy state of Alberta’s government finances. The province’s recent economic update confirmed Alberta is set to run a huge budget surplus this year. Premier Danielle Smith has decided to use a share of the surplus to send cheques to some Albertans to help offset the rising costs of goods and services.

However, when assessing the province’s finances, it’s important to consider recent history—because then, a different picture emerges. Despite the good news story about a big surplus this year, a longer historical view reminds us that the past 20 years have produced fiscal wreckage in the province that will take more than one windfall year to repair.

Back in 2000-01, in the wake of substantial policy reforms led by premier Ralph Klein that cut both taxes and spending, Alberta’s net debt fell to zero—that is, the province’s financial assets were briefly equal to its debts. The province’s asset position continued to increase in subsequent years. In 2007/08, Alberta’s financial assets exceeded its debt by $35 billion.

Even as the province’s assets accumulated during the 2000s, however, fiscal policy challenges were beginning to develop. Specifically, the provincial government began to increase spending rapidly and relied on natural resource revenue to pay for it. This reliance on natural resource revenues masked the province’s growing spending problem and squandered an opportunity to save more for the future.

Starting with the onset of the global recession of 2008/09, a series of resource price shocks and related recessions exposed the province’s spending problem. Successive Progressive Conservative and New Democratic governments alike did not meaningfully reduce provincial spending, and large annual budget deficits persisted almost uninterrupted until this year.

As a result, Alberta’s net asset base quickly began to disappear. By 2016/17, the $35 billion in net assets was gone and the province became indebted again, with the balance sheet deteriorating rapidly. By 2021/22, Alberta’s net debt reached $57 billion.

This is a staggering level of fiscal deterioration in a province of 4.4 million people. Alberta’s net asset position worsened by nearly $23,000 per person between fiscal years 2007 and 2021.

Again, this year’s $12 billion budget surplus is good news, but we must consider this in the context of Alberta’s recent fiscal history, which has been characterized by nearly $100 billion in combined depleted financial assets and added debt.

In light of this longer historical view of Alberta’s fiscal problems and the policy decisions that contributed to the accumulation of provincial debt, it’s clear that one big surplus hasn’t repaired the damage. If the new Smith government wants to put Alberta on solid fiscal footing and avoid another enormous round of debt accumulation the next time resource royalties dry up, it must begin an extended period of spending restraint.