Alberta’s finances deteriorating quicker than expected

Premier Rachel Notley’s government yesterday released Alberta’s latest economic and fiscal update, pointing to even more red ink on the province’s operating budget than was projected in the October budget.

Alberta’s projected operating deficit for 2015/16 is now $6.3 billion, up from the $6.1 billion four months ago. The deficit would have been even larger, at more than $6.5 billion, if not for the federal government’s $250 million transfer from a rarely used “fiscal stabilization” program designed to provide emergency assistance to provinces facing severe revenue downturns.

A $6.3 billion budget deficit is large in the context of a province of just 4.4 million residents. In fact, Alberta’s operating deficit for this year is the second largest in the country behind only Newfoundland and Labrador—both per person and relative to GDP.

And there are signs that next year might be even worse. Alberta Finance Minister Joe Ceci recently stated that Alberta’s operating deficit could climb as high as $10.4 billion in 2016/17, up from the $5.4 billion initially planned in the last budget.

However, both the deficits of $6.3 billion in 2015/16 and $10.4 billion in 2016/17 significantly understate the rate at which Alberta’s net financial position is deteriorating. The net financial position is a measure used by governments to track the difference between financial assets held and debt owed. Historically, Alberta has been in the enviable position of holding more financial assets than debt.

As we have noted before, governments often rack up debt in a given year far beyond what the operating budget suggests due to debt-financed capital expenditures, which do not fully show up in the operating budget.

We can get a more complete sense of how quickly Alberta’s net financial position is deteriorating from year to year by looking at this more complete measure, which includes “deficits” in both the operating and capital budgets. On this metric, in 2015/16, Alberta will see a decrease in its net financial position of approximately $9 billion—much higher than the $6.3 billion operating deficit. Again, the difference is partly driven by debt to finance proposed capital expenditures.

Assuming that the government does not adjust its capital plan next year from the projections offered in its last budget, along with Minister Ceci’s newly announced operating deficit for 2016/17 ($10.4 billion), Alberta’s net financial position could decrease by another $14 billion in 2016/17, making it a net debtor province.

When you consider these two years in context, the scale of Alberta’s current fiscal predicament begins to come into focus. If the operating deficit does indeed climb to $10.4 billion next year, and the government does not adjust its capital spending plan, this would mean that Alberta’s net financial position can be expected to deteriorate by $23 billion over just two years. For context, as University of Calgary economist Ron Kneebone recently pointed out, that’s more money than currently sits in the province’s Heritage Fund.

Compared to Alberta’s net financial position in 2007/08, that’s a swing of $45 billion within the span of less than a decade. In short, it’s a remarkable deterioration in a very brief period of time.

Premier Notley’s government must recognize the gravity of the situation it faces and take decisive action to slow the expected pace of debt accumulation.