Spending drives Alberta’s chronic deficits

Alberta Finance Minister Joe Ceci (pictured above) just released the provincial government’s Third Quarter Fiscal Update and unfortunately the news isn’t good. The province now expects the operating deficit to reach $6.3 billion in 2015/16, up from the $6.1 billion projected in the October 2015 budget.

More troublingly, Ceci warned that the operating deficit for 2016/17 could be $5 billion more than projected just four months ago, which could result in a $10.4 billion deficit. Alberta is on track to lose its enviable position within Canada of holding more financial assets than government debt and will become a net debtor province for the first time in more than 15 years.

The government should take decisive action to prevent or at least mitigate the rapid accumulation in government debt. But what exactly should the nature of that action be? While some have focused on the need to raise more revenue to offset declining resource royalties, this view misdiagnoses the cause of Alberta’s fiscal predicament and therefore identifies the wrong solution.

A key reason for Alberta’s current precarious fiscal state is rapid spending growth over the past decade. With relatively high oil prices throughout most of the last decade, successive Alberta governments ramped up spending as though the good times of high resource royalties would never end. Now facing the inevitable bust, the Notley government finds itself at a spending level it simply cannot support.

A recent Fraser Institute study found that provincial program spending between 2004/05 and 2014/15 increased by nearly 100 per cent—twice the combined rate of inflation plus population growth. Using the data available at the time, the study estimated that the provincial government would have been on track for a $4.4 billion surplus for 2015/16 had the province simply increased program spending more modestly at a rate sufficient to keep pace with the growth in prices and population.

While projected revenue in the Fiscal Update is in fact lower than what was projected in the budget, it’s still greater than what total spending would be in the 2015/16 fiscal year had spending growth since 2004/05 been restrained.

Extrapolating based on the most recent available inflation and population data, the province would still be in a $3.3 billion surplus for the 2015/16 fiscal year had program spending increases since 2004/05 been limited to the rate of inflation plus population growth. Furthermore, the province would have run budget surpluses rather than deficits in recent years, and would now have a much stronger fiscal position to buffer against the reality of depressed resource prices.

Blaming the deficits on low oil prices is a convenient but false narrative. In the past, during the Klein years for example, Alberta has found ways to run surpluses when oil prices were much lower than today (after adjusting for inflation) and failed to balance the budget in years when oil prices were much higher.

Consider that from 1994/95 to 2007/08, Alberta recorded 14 consecutive surpluses with West Texas Intermediate (WTI) oil at an average of roughly $43 per barrel (in 2015 U.S. dollars). Yet over the past eight years, the province has run deficits in all but one year despite oil prices averaging $88 per barrel (in 2015 U.S. dollars). The record simply does not support the notion that low oil prices inevitably lead to deficits.
Premier Notley’s government faces serious fiscal problems that are not, for the most part, of its own making. Nevertheless, it carries the responsibility of solving them. To do so, it must recognize the source of the problem and strike at its root by reforming and reducing provincial spending rather than taking the misguided approach of focusing on revenue measures and trying to tax the problem away.