Alberta remains in precarious fiscal position

The Parliamentary Budget Officer (PBO) recently published its annual report on the health of government finances across Canada. Given the recent and ongoing oil and gas boom, it’s not surprising that Alberta’s fiscal picture has improved since last year. If we scratch below the surface, however, we see that the provincial government has not yet repaired Alberta’s finances for the long-term.

Put simply, a government’s finances are unsustainable if, under current policies and reasonable economic assumptions, government debt is on track to grow faster than the economy. According to the report, Alberta’s debt relative to the economy (also known as the debt-to-GDP ratio) is projected to slowly decline over the long-term.

And that’s good news, in and of itself. But while the PBO report is a valuable resource, all analyses have limitations. For example, the report assesses Alberta’s fiscal sustainability based on current revenue levels, which are heavily influenced by recent high natural resource revenues. Without this recent revenue windfall, Alberta’s fiscal story would be very different.

Consider that last year before the resource boom, according to the previous 2021 PBO report, Alberta’s finances were unsustainable and required a large fiscal adjustment (possibly spending reductions and/or tax increases) to prevent rapid growth in the province’s debt-to-GDP ratio. Other leading public finance experts have come to the same conclusion.

In other words, the data tell a simple story—the provincial government’s finances are sustainable, given current policies, only if natural resource revenues remain elevated for the long-term. But they’re unsustainable in the absence of abundant natural resource revenue.

So in reality, Alberta remains in a risky fiscal position. Hopefully, based on the last 15 years, policymakers in Edmonton have learned how quickly damage can accumulate if the province relies on natural resource revenue that may or may not materialize. Over this period Alberta ran nearly uninterrupted budget deficits and saw its net fiscal position deteriorate by almost $100 billion.

Clearly, it would be irresponsible for the provincial government to risk repeating this fiscal collapse. Instead, it should align spending levels more closely with more dependable sources of tax revenue while resisting the temptation to spend volatile oil and natural gas revenue on day-to-day-spending. Rather than spending natural resource revenue, it should save it in a fiscal stabilization fund or resume contributions to the Heritage Fund (or some combination of both). Indeed, this strategy can protect the province from another run-up in debt when resource revenue inevitably declines in the future.

The last two PBO reports show that, despite the province’s current resource revenue windfall and budget surplus, Alberta’s fiscal future is far from secure. Through spending discipline and savings, the provincial government can help ensure Alberta’s finances are sustainable and able to withstand even large fluctuations in natural resource revenue.