Spending restraint can limit debt accumulation in Alberta

In a recent study, we showed that the spending choices Alberta's provincial government makes in the years ahead will play an important role in shaping the pace of provincial debt accumulation between now and 2019/20.

The Government of Alberta is on track to return to a net financial debt position (the value of gross government liabilities is greater than the value of the province’s financial assets) for the first time in more than a decade. The question now is how much debt the province will accumulate, and how fast.

Extrapolating from the latest provincial government spending and revenue projections, Alberta is on pace to accumulate $19.8 billion in net financial asset debt by 2019/20. This is a remarkable turnaround, considering that as recently as 2007/08, Alberta enjoyed a net financial asset position of approximately $35 billion. In other words in 2019/20, Alberta's net asset position will deteriorate by approximately $55 billion in just 12 years (see below chart).

There are good reasons to think, however, that the government’s projections are overly optimistic. For starters, Alberta Finance Minister Joe Ceci (pictured at top of page) has already said next year’s deficit will be $5 billion larger than the $5.4 billion deficit previously projected. In light of these comments, we can likely expect the government’s debt projections, which were made prior to the finance minister’s comment, will be higher by $5 billion. Making the conservative assumption this is a one-time occurrence, this means the government is now expecting to accumulate $24.8 billion in debt, as opposed to $19.8 billion. That’s translates into about $5,500 more debt per Albertan.

It's very likely that the upcoming budget will revise the government's revenue projections for future years downwards, which would cause a further increase in the amount of debt the province expects to accumulate in the years ahead.

Clearly, there are risks to the government's financial position related to the amount of revenue it will take in.

However, there’s another set of risks that has received much less attention to be found on the spending side of the ledger. Simply put, if the government fails to exercise spending restraint in the years ahead, the debt will grow much faster than presently expected.

For example, if the government increases spending at the same rate as the provincial economy is expected to grow between now and 2019/20 (4.7 per cent annually), the province will accumulate $36.1 billion in net debt by 2019/20 (see chart below). That’s roughly $8,000 per Albertan—46 per cent more than currently expected. And it's important to recognize that this projection is based on revenue projections that may prove to be optimistic. If revenue growth is weaker than expected, the debt could grow further still.

Given that Alberta’s program spending increased at a significantly faster rate than economic growth between 2004/05 and 2014/15, and that the current government increased spending for 2015/16 beyond what had been budgeted, this is not an implausible scenario. There are no guarantees the government will in fact hold spending increases significantly below the rate of GDP growth.

Just as the government can produce faster-than-expected debt accumulation over the course of its mandate, if it increases spending beyond what is currently planned, it can also significantly slow the rate of debt accumulation by holding spending growth below current projections.

For example, if the government were able to freeze program spending at 2015/16 levels, Alberta would only accumulate $11.8 billion in debt by 2019/20. That’s less than half what's currently expected.
Zero growth may seem an ambitious goal, but it should be considered in the context of rapid spending growth over the past decade. Considering that program spending increased by 98.3 per cent between 2004/05 and 2014/15, a period of zero growth or very close to zero growth may be practical.

The government doesn't control commodity prices and has limited direct control over provincial revenue growth. That does not mean it cannot slow down the rate of provincial debt accumulation. The spending choices it makes in the years ahead will ultimately play a big role in determining the extent the government saddles future Albertan taxpayers and their families with a large public debt that will need to be serviced and repaid.