What to look for in Alberta’s budget

Premier Rachel Notley and Finance Minister Joe Ceci have dropped hints for Albertans in terms what will be in tomorrow’s budget. For instance, they have suggested the budget deficit will be more than $10 billion. Yet there are still many outstanding questions. Here are a few key things to look for:

Will the budget strike at the root of Alberta’s fiscal problems—spending?

While some blame low oil prices and the resulting decline in revenue as the reason for Alberta’s fiscal problems, in a recent study we showed the primary culprit for Alberta’s precarious fiscal position is a rapid increase in government spending over the past decade. Successive governments have been unwilling to control spending when times were good and therefore the current government has been ill-prepared for the bad times.

Premier Notley inherited a difficult situation but her government can change course by reducing and reforming spending in a prudent way that puts Alberta’s finances on a more sound footing. Indeed, the trajectory of spending in the years ahead will be a crucial item to watch in the budget. In fact, a recent Fraser Institute analysis found that spending choices the government makes in the years ahead will have a substantial impact on the rate Alberta accumulates new debt.

How much debt will Alberta rack up?

Revenue and expenditure forecasts from the October budget and most recent fiscal update suggest the Notley government expected Alberta’s net debt (after adjusting for financial assets) would climb to approximately $20 billion by the end of its mandate. Since then, the province’s fiscal outlook has weakened dramatically. Barring a major recovery in oil prices, the province will accumulate significantly more debt over the next several years. The question is how much, and how fast?

The pace at which the province accumulates new debt in the years ahead will depend on a number of factors, including the annual growth in operating spending and capital spending. In addition to any potential increases in operating spending (health care and education, for example), increased capital spending (roads and maintenance, for example) financed through debt will accelerate the rate of debt accumulation. Given comments by the premier and finance minister that this will be a “shock absorber” budget that will include increased capital spending in an attempt to “stimulate” the economy, this could have a significant impact on the province’s net financial position.

Critically, the government has already indicated that Alberta will become a net debtor province this year for the first time since 1999/00. All of the new debt acquired by the government in the coming years will be passed along to young Albertans, so we should keep a close eye on exactly how much debt that will be.

Is there a path to budgetary balance?

The finance minister recently stated that the government has no plans or even a target date for eliminating the operating deficit. Without a clear target date for when the budget will be balanced, the danger is that deficit spending can become “business as usual” rather than a temporary condition. Routine deficits mean more debt, and they also mean provincial finances are vulnerable to additional future economic shocks that may occur which can result in even deeper deficits, less fiscal flexibility, and more uncertainty for investors and entrepreneurs. Hopefully the budget will provide some clarity about when the deficit will be erased.

Will the government implement more tax hikes?

So far, the government has largely avoided meaningful spending reform and has tried to fill the budget hole with a series of economically damaging tax hikes that harm, rather than help, Alberta’s struggling economy. Personal income taxes, corporate taxes, and excise taxes have all been raised, and the government has announced the creation of a new carbon tax. Canadian history suggests that efforts to erase deficits through higher taxes have generally been unsuccessful. Further, empirical economic research shows that efforts to eliminate budget deficits through tax hikes have a harmful effect on economic growth. The government’s efforts to date to reduce the deficit through tax hikes have been misguided. We will be looking to see if there are any announcements in today’s budget.