Albertans set to pay more interest on government debt—despite surpluses

In its first budget, the Smith government forecasted surpluses over the next three years. Despite this good news, the budget also revealed that due to persistent debt and higher interest rates, debt interest payments on the government’s debt will also increase.

Alberta’s recent history with government debt and interest costs is unique in Canada. After the province essentially achieved “debt free” status in 2004/05, when its financial assets exceeded the miniscule debt that remained on the balance sheet, Alberta enjoyed a period of nearly non-existent debt interest costs while every other province faced significant levels of debt interest.

This fiscal advantage allowed the province to keep taxes low and ensure that tax dollars were spent on public services or savings for the future, prompting Premier Ralph Klein to say that “never again will this government or the people of this province have to set aside another tax dollar on debt.”

Unfortunately, over time Alberta’s debt burden returned, and with it, the cost of significant debt interest payments. Indeed, as the province ran persistent deficits in the 2010s and debt started piling up as the decade went on, annual debt interest payments increased.

In 2008/09 Alberta’s government debt interest costs were negligible at just $58 per person. By 2022/23, this number will reach a projected $598 per person.

And despite large expected surpluses over the next few years, Alberta’s debt interest costs are projected to keep rising. According to the Smith budget, debt interest costs will reach a forecasted $3.1 billion in 2025/26, equal to about $637 per Albertan. Keep in mind, that’s money no longer available for other important priorities such as health care, education or tax relief.

To avoid further increases in the debt burden for Albertans, the Smith government should understand why debt interest payments have reappeared as a meaningful line item on the provincial budget. Successive governments ran large deficits, fuelled by high spending, which led to the rapid increase in debt and related growth of debt interest payments.

If the Smith government continues the high-spending approach of past governments, deficits may well return in the future and the pace of debt accumulation could accelerate. All else equal, this would mean continued growth in debt interest costs for Albertans. Indeed, Alberta’s current budget surplus is almost entirely the result of higher resource revenues, which won’t last forever. Unless the government aligns spending with more reliable sources of tax revenue, future declines in resource revenue will mean more deficits, debt accumulation and even higher debt interest costs in the future.

In its first budget, the Smith government touted budget surpluses. Unfortunately, Albertans will still pay the price of past debt accumulation through higher interest payments.