Alberta government must commit to spending restraint and reform
In Alberta’s recent mid-year fiscal update, the provincial government delivered some good news to residents. After recording a budget surplus in 2021/22, the government expects another $12.3 billion surplus in 2022/23. While this is a positive development, the Smith government has some tough decisions to make in the upcoming 2023 budget to ensure provincial finances don’t turn back to red.
First, a bit of background.
After many years as Canada’s only “debt-free” province, Alberta began to incur routine budget deficits in 2008/09. By 2016/17, Alberta officially lost its debt-free status, and as deficits continued, the province’s overall financial position deteriorated from a net asset position of $47.5 billion in 2007/08 (inflation-adjusted) to a net debt position of $60.8 billion in fiscal year 2021/22—a deterioration of more than $108 billion. This represented the largest growth in government net debt of any province from 2007/08 to 2021/22.
Of course, debt accumulation comes with costs. As debt grows, all else equal, more tax dollars go towards paying interest costs on the government’s debt rather than important programs and services for Albertans or towards tax relief. For perspective, in 2007/08, Alberta spent only $61 per person on provincial government debt interest costs. That number grew to $595 per person this fiscal year.
But what drove Alberta’s debt accumulation over roughly the last decade and a half?
Governments in Edmonton have a bad habit of increasing spending during periods of relatively high resource revenue from natural gas and oil royalties, which leads to deficits when those resource revenues decline. Indeed, it was increased spending during a resource boom in the 2000s that eventually lead to Alberta’s deficits and subsequent debt accumulation once resource revenues declined.
Alberta’s recent return to surplus, fuelled by a rebound in resource revenue, has temporarily improved the province’s finances. Indeed, when the government runs surpluses it can reduce the net debt burden on Albertans. That’s what’s happening today. In 2022/23, the province will once again be the lowest debt jurisdiction in Canada at $10,131 per person—nearly $500 less than British Columbia, the next lowest-debt jurisdiction per person.
But the reason for our fiscal turnaround is the same reason the Smith government must be proactive moving forward. As our history has shown, relatively high resource revenue won’t last forever, and without action, neither will Alberta’s surpluses. The first step for the provincial government is to avoid the temptation to repeat past mistakes by spending volatile resource revenue on day-to-day spending. Instead, it should align spending levels more closely with more dependable sources of tax revenue. In doing so, the government can help prevent another run-up in debt when resource revenues decline in the future.
Failure to demonstrate fiscal prudence in the upcoming budget will eventually lead to more government debt for Albertans. For this fiscal turnaround to last, the Smith government must commit to spending restraint and reform.