Chronic spending-driven deficits eroding Alberta’s financial position

Not so long ago, the Government of Alberta’s financial position was strong. In 2007/08 the province had net financial assets (the difference between financial assets and liabilities) amounting to $35 billion. In other words, the province held $35 billion more in assets than they had in debt (or liabilities). Since then, the province’s fiscal position has weakened dramatically. The government’s recent budget forecasts that at best by 2018/19, the government will have more debt than financial assets of $33.2 billion. Simply put, the province has gone from having assets of roughly $35 billion to being in debt to the tune of $33 billion in just over a decade.

While the recent decline in resource revenue is typically blamed for the province’s deficit problems, the province has run an operating deficit in all but one year since 2008/09—even when oil prices exceeded $90 per barrel.

The chart below illustrates the rapid deterioration of Alberta’s fiscal position. Note that Alberta’s net assets have declined every year since 2007/08—long before the recent decline in commodity prices. The pace of the decline accelerated after the oil price shock, but it’s important to recognize that the start of the downward trajectory began much earlier.

If the recent decline in oil prices didn’t start Alberta’s string of budget deficits and the decline in net assets to which those deficits contributed, what did? The answer is that the primary cause of these trends has been rapid growth in provincial government program spending.

Program spending has more than doubled since 2004/05 (108 per cent). This is nearly twice the combined rate of inflation plus population growth over that time period (59 per cent). The second chart below shows that had the provincial government simply increased program spending at a sufficient rate to account for inflation and population growth it would have spent just under $10 billion less this year than it actually did. In this scenario, Alberta would have had a significant surplus in 2015/16 (instead of a $6 billion deficit) and would have a very small deficit of less than $1 billion this year instead of the $10.4 billion deficit Albertans actually face.

In this scenario of spending growth since 2004/05, the marked deterioration in Alberta’s net asset position (shown in the first chart) simply would not have occurred.

Clearly, the decision of successive governments to increase spending at a faster rate than inflation plus population growth is responsible for the severity of the deficit and debts Alberta faces today. Unfortunately, the provincial government is doubling down on this approach. In its recent budget, the government planned for program spending to grow above the rate of inflation plus population growth in each of the next two years, and will be equal to that metric in 2018/19.

The third chart below shows that program spending (total spending minus debt charges) will increase by 3.2 per cent in 2016/17, 4.2 per cent in 2017/18, and 3.4 per cent in 2018/19. This amounts to an average annual increase of 3.6 per cent. That’s meaningfully higher than the 2.9 average annual increases that would occur if spending rose in line with inflation plus population over the next three years.

The first step to solving a problem is to recognize the root cause. Unfortunately, Alberta’s finance minister has shown no indication that he understands the extent to which spending is responsible for the province’s fiscal problems and no willingness to change course.