Smith government takes one step forward two steps back in Budget 2023
The Smith government had a generational opportunity in its first budget. With projected surpluses fuelled by a historic windfall in resource revenue, it could have put Alberta on track to eliminate its debt, reintroduce a rainy-day account to help avoid future deficits and/or lower personal income taxes. While the government will use some of the money to reduce Alberta’s debt, it has largely squandered this opportunity to improve Alberta for the long-term by spending a significant portion of the available surplus.
Alberta’s history is quite clear. When the provincial government uses windfall resource revenue to increase government spending, the province falls back into deficits when commodity prices and resource revenues inevitably decline. This habit contributed to routine deficits from 2008/09 to 2020/21 (and in 2016/17 robbed Alberta of its prized position as the only debt-free province). In fact, as a result of these deficits, Alberta was on track to become one of the most highly indebted provinces (adjusted for population) prior to the current unexpected windfall.
Ahead of Tuesday’s budget, leading economists provided three policy options for Alberta’s surpluses. First, set Alberta on track to eliminate provincial net debt (total debt minus financial assets) by 2030, saving nearly $20 billion in cumulative debt interest payments, which Albertans are ultimately responsible for paying. (In 2023/24, the budget allocates $1.4 billion to debt repayment, which is equal to about one quarter of the surplus forecasted last fall). Second, lower personal income taxes to a single rate of 8 per cent, keeping more money in Albertans’ pockets while helping fuel strong economic growth. And third, reintroduce a rainy-day account, which (this time) would constitutionally limit the amount of resource revenue available for annual spending by saving during the good times (as Alberta is currently experiencing) to help avoid deficits during bad times (periods of relatively low resource revenue).
Any one of these policies would have been preferable to spending away the windfall.
Unfortunately, the Smith government continues to repeat the mistakes of past governments. Indeed, in the fiscal update presented last fall, the Smith government already committed to spending $2.8 billion on inflation relief including $600 cash payouts to seniors and children in families in “middle-income” households. While many Albertans are undoubtedly struggling with the cost of living, these “targeted” measures are a slippery slope towards big deficits in the future should any spending become permanent.
In the budget, compared to the fall fiscal update, the Smith government increased spending further with an additional $1.8 billion for health care, $1.1 billion on social services and $600 million on education in 2023/24. As a result, program spending is projected to be $4.2 billion higher in 2023/24 than budgeted just a few months ago.
To be fair, this budget does introduce a “new fiscal framework” to guide government decision-making and use of surpluses in the future (options include paying down debt, saving in the Heritage Fund and/or onetime spending initiatives). However, the framework is based in statutory law, which means future governments can ignore or change the law at their discretion.
With new spending, the Smith government missed a golden opportunity to improve Alberta’s government finances for the long-term, which means we could be in fiscal trouble again once the province’s record high windfall ends.