alberta debt

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Why Is Alberta’s Deficit Still So Big?

Main Conclusions

  • The Government of Alberta has run nearly uninterrupted deficits since 2008/09 including deficits expected to average over $9 billion annually between 2016/17 and 2018/19.
  • Alberta’s deficit today is much larger than the deficit the current government inherited (about $6 billion) when it took office in 2015/16.
  • Blaming depressed oil prices or fiscal challenges that pre-date the recent recession for the size of Alberta’s deficits today is, at best, an oversimplification. Instead, spending choices made over the past three years are an important cause of the persistence of large deficits in Alberta.
  • If the current government followed the spending plans laid out in the budget of March 2015, Alberta would have a deficit of just under $3 billion in 2018/19 rather than $8.8 billion.
  • Assuming a common revenue forecast, if Alberta’s government had kept to the March 2015 spending forecast it would be on pace to shrink the deficit to under $2 billion by 2019/20 rather than nearly $7 billion. It would also be well positioned to balance the budget before its 2023/24 target.
  • These spending choices have important implications for Alberta’s debt: net debt is forecast to reach nearly $40 billion by 2019/20. Our projections show that under the more restrained spending scenario, debt would be less than half as large—just under $15 billion.

Budget increases debt burden for future generations of Albertans

By 2023/24, Alberta’s total net debt is projected to reach $56 billion—approximately $12,500 per person.

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Alternative Paths for Alberta's Budget: Balance by 2023/24 Is Not Enough

Alberta faces significant fiscal and economic challenges. The government has run nearly uninterrupted deficits since 2008/09 and has seen an approximately $57 billion decline in its net financial assets between 2008/09 and 2017/18. The government has stated that it will continue to run significant budget deficits for many years before finally achieving balance in 2023/24. This unambitious target for balancing the budget is not enough for three reasons: running deficits until 2023/24 would significantly add to the province’s rising debts; the current budget is based on an elevated level of taxation; and the current fiscal trajectory will mean that the provincial government will remain on the “resource roller coaster”.

In this publication, we use a detailed model of Alberta’s finances to project the evolution of Alberta’s spending levels, annual budget deficits, and debt accumulation between now and 2023/24 under various spending scenarios. First, we evaluate whether the provincial government is currently on track to meet its target date for eliminating the deficit elimination. It is not: our projection suggests that under existing trajectories for revenue and spending, the province will still have a $5 billion deficit in 2023/24. In the absence of a substantial—and unexpected—increase in revenue, our model suggests, therefore, that a significant slowdown in the rate of spending growth will be required to achieve a balanced budget by 2023/24. Specifically, we estimate that the provincial government will need to hold the growth of program spending to an average annual rate of 0.8% in the years ahead. These forecasts show that a balanced budget can be achieved by 2023/24 without nominal spending reductions. Given the scale of Alberta’s fiscal challenges, this represents an unambitious objective.

There are several reasons that running deficits for such a long time into the future will be perilous. First, continued deficits are leading to a significant accumulation of debt. Our projection shows that during the government’s proposed timeline for deficit elimination, Alberta’s net debt will climb to $62 billion and the cost of servicing the debt will double between now and 2023/24.

Second, the provincial government recently introduced several tax increases that have badly undermined the province’s former tax advantage. The spending plan outlined above will leave no room to reduce the province’s elevated tax burden. This is particularly important in light of recent decreases in US federal taxes. The province has gone from the lowest top statutory personal income and corporate income tax rates in North America to middle of the pack or worse in a few short years. So balancing the budget on a slow timeline without nominal spending reductions will mean foregoing an opportunity to restore the province’s formerly unambiguous advantage within North America as a result its low tax rates.

Third, this plan would not allow the province to get off the “resource roller coaster”. In other words, it would continue to use 100% of non-renewable resource revenue for current spending rather than contributing a portion to the Heritage Trust Fund, as was envisioned when the fund was created. Moreover, failing to get off the resource roller coaster leaves provincial finances vulnerable to future fluctuations in commodity prices.

What level of spending restraint or nominal reductions would be needed to achieve a balanced budget sooner or create fiscal room to address these? Our forecasts suggest the budget can be balanced one year ahead of schedule (by 2022/23) by holding the growth of program spending to 0.25% annually starting in 2018/19. Further, with modest annual spending reductions of 0.55% between now and 2021/22, the deficit could be eliminated two years ahead of schedule. Balance could be achieved by 2020/21 by reducing program spending at an average annual rate of 1.85% and, finally, the budget could be balanced by 2019/20 if the government were to reduce nominal program spending by 4.7% annually over the next two years.

We have not evaluated the specific advantages and disadvantages of the various deficit elimination strategies laid out above, but it is evident that balancing the budget at an earlier date would reduce the accumulation of debt while giving the provincial government room to provide tax relief and to reduce the province’s reliance on revenue from non-renewable resources.

Another tough year for Alberta finances

The $10.3 billion deficit the province plans to run this year is just shy of the provincial record of $10.8 billion set last year.

Alberta—from fiscal leader to fiscal laggard

The province’s debt will reach $45 billion by 2019/20.

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Canada’s Past Fiscal Leaders Are Now Fiscal Laggards: An Analysis of 2017 Provincial Budgets

Around the turn of the 21st century, Alberta and Ontario could both boast of having comparatively sound public finances relative to most other provinces. In recent years, however, serious fiscal problems have emerged in both provinces. Alberta and Ontario were once fiscal leaders in Canada, but they are now among the country’s unsuccessful fiscal managers. Meanwhile, several other provinces that at various times have been considered weak fiscal performers are currently pursuing policies that are gradually improving the condition of their public finances. Saskatchewan, Quebec, and British Columbia all currently have in place relatively prudent fiscal plans that minimize debt accumulation and strengthen provincial finances over time. Indeed, several of Canada’s historical fiscal laggards have become the country’s new leaders.

This paper analyzes the various provincial budgets tabled in 2017 and illustrates the extent to which fiscal leadership in Canada’s provinces has changed in recent years. Among other things, it finds that at the provincial level, government debt accumulation in Canada is currently being driven primarily by just two provinces—Alberta and Ontario. These two, which are home to about half of the country’s population, are responsible for approximately 74 percent of all new provincial government net debt being added in Canada this year.

Ontario now carries one of the highest per-capita debt burdens in Canada. Furthermore, Ontario continues to add significant new debt each year despite projecting a balanced operating budget this year. In fact, over the next three years, Ontario expects to add $34.1 billion in new debt—almost exactly the same amount as the $34.8 billion it added during the last three.

Serious fiscal problems have emerged in recent years in Alberta as well. A significant store of the province’s net assets has been erased over the past decade, and it has now joined the rest of the provinces as a net debtor with provincial debts exceeding financial assets. Alberta still enjoys the lowest debt-to-GDP ratio in the country, but the province’s long string of budget deficits has begun to significantly undermine this fiscal advantage. What’s more, the pace of debt accumulation has accelerated dramatically in recent years, as the province has begun to run some of the largest budget deficits in its history. In fact, the province expects to see its net debt climb to approximately $10,000 per person by 2019/20—up from essentially zero as recently as 2015/16.

Although Alberta’s debt burden—measured both per person and as a share of GDP—is currently the lowest in Canada, the pace of debt accumulation in Alberta is such that the gap between it and other provinces is rapidly closing and a substantial debt burden is projected to quickly emerge in the province over the next few years.

Despite these fiscal challenges, both Ontario and Alberta have significantly increased spending in their 2017 budgets, and neither has a plan to make meaningful progress slowing their pace of debt accumulation during the life of their current fiscal plans.

On the other hand, Quebec and Saskatchewan, two provinces that have at various points faced severe fiscal problems or been viewed as examples of unsuccessful fiscal management, have in their 2017 budgets taken meaningful steps to address the challenges they face.

Saskatchewan is reducing expenditures and plans to eliminate its deficit in two years (by 2019/20), while Quebec has stopped adding debt entirely and is making meaningful progress in shrinking its debt-to-GDP ratio. The contrast between these two provinces, on the one hand, and Alberta and Ontario, on the other, is clear.

British Columbia, once also a fiscal laggard in the 1990s, has taken the necessary steps that have enabled it to achieve its current status as fiscal leader. But with a change in government in July 2017, questions remain as to whether the province will continue to build on its recent fiscal policy success.

At this point, historical reputations for successful fiscal management seem to bear little relationship to current reality when it comes to keeping deficits and debt in check. On public finances in general, Canada’s provinces have been turned upside down, which has important implications for those residing in provinces that have become Canada’s new fiscal laggards—and new fiscal leaders.

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