Alberta government faces fundamental choice in upcoming budget

Thanks to a windfall in resource revenue, Alberta is enjoying a period of surpluses. As the Smith government prepares to table its next budget on Feb. 28, it has two options—use the province’s windfall to improve long-term prosperity, or spend it away.

Governments in Alberta have often chosen the latter, spending windfall resource revenue as it came through the door, which only led back to deficits when such revenues inevitably declined. Indeed, this pattern contributed to the recent string of deficits from 2008/09 to 2020/21 (excluding 2014/15)—which led to $60 billion in provincial debt accumulation. If the Smith government can instead avoid the temptation to increase spending, it can help prevent the ongoing boom-bust cycle while pursuing meaningful reforms to benefit Albertans.

For instance, Alberta can use the surpluses to lower personal income taxes to a single rate of 8 per cent. This would keep more money in Albertans’ pockets while helping to attract entrepreneurs, businessowners and skilled workers that fuel strong economic growth. As estimated by economist Jack Mintz, the tax change would consume no more than about one-third of the current projected surplus (2022/23), which could be replaced by ongoing revenue sources over time, for instance, by repatriating the federal consumer carbon tax for a made-in-Alberta approach.

Moreover, economist Trevor Tombe recently showed how the provincial government could use Alberta’s surpluses to eliminate Alberta’s net debt (total debt minus financial assets) by 2030 by holding growth in program spending to the current fiscal plan, and then to inflation and population growth thereafter. Paying off the provincial debt by 2030 could save nearly $20 billion in cumulative debt interest payments. And remember, every dollar spent on debt interest costs is a dollar unavailable for important services such as health care or education.

Finally, the province could use the surpluses to re-establish a rainy-day account similar to the previous Alberta Sustainability Fund (ASF). The account, which would help governments avoid deficits when resource revenues decline in the future, was eliminated in 2013 after governments drained it of its savings. To reintroduce the fund, the first step is to determine a stable amount of resource revenue to include in the budget annually, which limits the amount available for spending. Any resource revenue above that amount is automatically saved in the ASF to be withdrawn in years when resource revenue falls below the stable amount. The logic is simple—save during good times to help avoid deficits during bad times. This time, rules around the fund should be constitutional, which would help to ensure it’s sustained over time.

As the Smith government prepares to table its first budget, it has an important choice to make. Spend away the windfall, repeating past mistakes, or establish a path towards long-term prosperity for Albertans today and in the future.