alberta deficit

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.

Premier Notley choosing the wrong NDP premier to emulate

Alberta has seen a run-up of projected net debt totalling about $10,000 per Albertan by 2019/20—up from essentially zero in 2015/16.

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Rae Days in Alberta: The Notley Government at Two Years

When Premier Notley took office two years ago in Alberta, her new government faced severe fiscal challenges. The province had a large and growing budget deficit and was headed towards net debt status for the first time in approximately 15 years.

It was impossible to predict in advance with any degree of confidence how Premier Notley would confront these challenges. Canadian history shows us that political labels are not a reliable predictor of a new government’s approach to fiscal policy. All of Canada’s major parties have produced governments that have pursued sound approaches to fiscal management. Similarly, all have produced governments that were far less successful in this area.

When Premier Notley took office, there were at least two broad historical models of NDP fiscal management from which she could have drawn. One of these was the Bob Rae model of higher spending and increased taxes. The other was the Roy Romanow model from Saskatchewan characterized by spending discipline. Both premiers inherited daunting fiscal challenges and big deficits in the early 1990s, but took markedly different approaches to addressing those challenges, and these approaches produced vastly different outcomes.

Two years into her government, it is clear that Premier Notley is following the example and model set by Bob Rae in Ontario during the early 1990s. For example, during his first two years in office, Premier Rae increased program spending in Ontario by approximately 16 percent. Premier Notley has taken a very similar path, increasing program spending by 11 percent during her first two years in office. These policy choices contrast sharply with those made by Roy Romanow’s government in Saskatchewan, which reduced spending in nominal terms during its initial years in office and then essentially held nominal spending flat through the rest of its first mandate.

On tax policy, the Alberta NDP is again closely following the approach taken by Bob Rae’s government during the early 1990s, which increased a number of different taxes on Ontarians. Similarly, the Alberta NDP under Premier Notley has increased taxes repeatedly. Significant tax increases include those to the personal income tax and the corporate income tax, as well as a broadening of the province’s carbon levy, which is scheduled to see further increases in the future.

When it comes to fiscal outcomes, Premier Notley also appears to be on track for a record that looks much more like Premier Rae’s than Premier Romanow’s. Premier Romanow reduced spending and was able to eliminate a large deficit in just three years. By contrast, Premier Rae ran large deficits throughout his term in office. According to Alberta’s most recent fiscal plan, Premier Notley’s NDP government expects to run large deficits in every year of its mandate, thereby following Bob Rae’s example.

In a study published by the Fraser Institute two years ago, we wrote:

As Premier Notley and her cabinet work to develop their fiscal policy strategy, they would be well-advised to follow the model of New Democratic governance provided by their neighbours in Saskatchewan during the early 1990s. If, instead, they emulate the Ontario NDP model for the same time period, the result will likely be increased spending, higher taxes, unsustainable deficits, and reduced prosperity for Albertans in the years ahead.

Two years later, it is clear that the Notley government has indeed chosen to reject the Romanow model in favour of the Rae model. Unfortunately, but predictably, the Rae policy approach is producing similar fiscal outcomes in Alberta today as it did in Ontario during the 1990s. Albertans will continue to feel the consequences of these decisions and outcomes for many years to come.

Debt becoming the new normal in Alberta

The Notley government forecasts it will add $13.6 billion in debt this year.

Alberta’s run of deficits tower over Ontario’s worst

Alberta’s budget deficit in 2015/16 was $2,513 per person.

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Summary

  • Alberta’s public finances are deteriorating rapidly, with the provincial government set to run a cumulative budget deficit of $27.6 billion over the three-year period from 2015/16 to 2017/18.
  • Until recently, by far the largest deficits of any province since the turn of the century were those run by Ontario in the years during and following the financial crisis of 2008/09. From 2009/10 to 2011/12, Ontario ran a cumulative budget deficit of $3,864 per person (in 2015 dollars).
  • Alberta’s current string of budget deficits are substantially larger than Ontario’s during that period. Between 2015/16 and 2017/18, Alberta’s cumulative budget deficit will be $6,385 per person ($2015 dollars).
  • When we compare the budget deficits relative to the size of the provincial economies, Alberta’s current deficits are still larger than those run by Ontario during the years following the financial crisis.
  • Alberta entered 2015/16 with no net debt at all. However, due to the size of current budget deficits and the resulting rate of debt accumulation, Alberta’s debt levels are rapidly converging with Ontario’s. In 2014/15, Ontario’s net debt per person was $24,256 larger than Alberta’s. In 2018/19, that gap is expected to have shrunk to $14,597 (both in 2015 dollars). In other words, about 40 percent of the per-capita debt gap between Alberta and highly indebted Ontario will have been wiped out in just five years.
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