Alberta government should rein in spending despite budget surplus

The Smith government last week released its mid-year fiscal update, which provides an overview of the current state of provincial finances. Alberta will run a projected $5.5 billion budget surplus in 2023/24 with ongoing surpluses in the next two fiscal years—fuelled in large part by an ongoing surge in resource revenue. This is good news, but to avoid future deficits, the Smith government must rein in spending.

Here’s the problem. Governments in Alberta have a long history of increasing provincial spending during periods of relatively high resource revenue, which inevitably leads to deficits once resource revenues decline.

Consider the late-1990s. Resource revenue began increasing, and Alberta enjoyed surpluses while per-person spending (adjusted for inflation, excluding interest costs) increased from $7,393 in 1998 to $13,114 by 2008. Once resource revenue declined, the province had to borrow money (i.e. incur deficits) to pay for high spending. Routine budget deficits from 2008/09 to 2020/21 led to massive debt accumulation, which Albertans must finance through their taxes.

For perspective, after adjusting for inflation, Albertans went from paying $76 per person in provincial government debt interest costs in 2008/09 to $569 per person in 2019/20—even before COVID.

Today, as high resource revenue continues to fuel budget surpluses, the Smith government is repeating past mistakes. The government has increased nominal program spending (from 2022/23 to 2024/25) by nearly $10 billion since its original plan in the 2022 mid-year update—that’s $2,120 more per Albertan. Again, such high spending only increases the risk of deficits once relatively high resource revenues inevitably decline.

If the Smith government instead reined in spending, it could use this opportunity to avoid future deficits rather than fuel them. In other words, it could help prevent the ongoing resource revenue roller-coaster, which has consistently led to debt accumulation in the past.

The first step is to reintroduce the Alberta Sustainability Fund (ASF), which limits the amount of resource revenue included in the budget. Indeed, the ASF was established in 2003 to “stabilize” a specific amount of resource revenue for the budget, which limits the amount of money available for annual spending. It worked like a rainy-day fund; save resource revenue above the set amount during good times to finance a stable amount of resource revenue for the budget—and avoid deficits—during bad times.

A recent study found with some spending restraint, Alberta could save enough resource revenue to fund a rainy-day fund worth $9.8 billion by 2025/26—all while maintaining a balanced budget and avoiding a reduction in nominal spending.

The previous ASF, however, was based in statutory law, which meant its rules were easily changed and the government discarded the fund entirely in 2013. The Smith government should learn from this and establish the specific amount of resource revenue for the budget as a “constitutional rule,” which would make it more difficult to change in the future.

Alberta’s budget surpluses will only last as long as resource revenues remain high. For long-term fiscal stability, the Smith government must control spending, set a stable amount of resource revenue for the budget annually, and save for the future.