Alberta’s 2018 budget—a breathtaking exercise in complacency

Yesterday, the Alberta government released its budget for the 2018/19 fiscal year. The document is essentially a status quo budget, which promises continued nominal spending growth over the rest of its fiscal plan (though more moderate than the growth this government has delivered so far). And partly as a result, the government expects to make almost no progress in reducing the deficit over the next few years.

Specifically, this year’s $8.8 billion deficit is expected to ease to $7.0 billion in 2020/21.

This approach, given the seriousness of Alberta’s fiscal challenges and the rate at which the province’s financial position is deteriorating, is nothing short of breathtaking.

To understand why, it’s first necessary to understand how quickly the province is racking up debt. This year, Alberta’s net debt is expected to climb to $30.5 billion, up from $20.3 billion last year. This is an increase of $10.2 billion in just one year. The reason the increase in debt is larger than the budget deficit is because the deficit does not include new debt incurred for long-term capital expenditures. To put this large number in context, it’s about $2,500 in new debt per Albertan in just one year.

And compared to recent years, there’s nothing anomalous about this year’s increase. Last year, Alberta’s net debt grew by $11.4 billion. The year before, Alberta’s net financial position deteriorated $12.3 billion. In short, $10 billion-plus in new debt annually has become the new normal for Alberta.

The Notley government’s fiscal plan does almost nothing to slow the pace. Over the next two years, Alberta’s debt is set to climb another $17.7 billion, reaching $48.2 billion in 2020/21, all of which will have to be serviced by future generations of Albertans.

Yes, it’s true that for the moment Alberta still has the smallest debt burden in Canada, but with this pace of debt accumulation, this is no justification for complacency.

Consider that in 2020/21 Alberta’s net debt of $48.2 billion will amount to approximately $11,500 per Albertan. That’s approximately half as much per-person debt as Quebec is expecting. But Quebec piled-up its debt through decades of fiscal mismanagement (which it’s now slowly reversing). Alberta, on the other hand, will reach $11,500 per person just six years removed from when the province was “net debt free,” meaning its financial assets exceeded its debts.

If Alberta continues at anything like this pace, the gap between Alberta and highly-indebted regions such as Ontario, Quebec and the Maritimes (in terms of per-person debt) will continue to shrink very quickly.

And it’s not just the speed of Alberta’s fiscal deterioration that’s so worrying, it’s that the deterioration has been going on for so long. Consider that as recently as 2007/08, Alberta enjoyed a net asset position of $35 billion. This means that once net debt reaches $48 billion in 2020/21, Alberta will have burned through $83 billion in net assets in 13 years. In a province of approximately four million residents, this is a remarkable total, with no recent precedent in any large Canadian province.

And yet, year after year, budget after budget, Alberta’s government demonstrates remarkable complacency about this avalanche of new debt and stubbornly refuses to take action to reform and reduce provincial spending.

This year, total spending is expected to be up 14.5 per cent from the level this government inherited in 2015/16. Very modest spending restraint (not adequate for the challenges we face) and a slowdown in spending growth is promised in the years ahead. But there’s reason to be skeptical of even this modest commitment, given this government’s repeated history of blowing past self-imposed spending targets. Last year, for example, the government spent about $1 billion more than projected in the 2017/18 budget.

Spending growth by successive governments (including the current one) is a primary cause of Alberta’s fiscal challenges. Free-spending by successive PC governments during years when resource revenue was strong left the province in a vulnerable position, and meant that big deficits opened up when resource revenues fell. The Notley government’s insistence on continuing to increase spending even as the pace of debt accumulation has accelerated has made the big problems it inherited even bigger.

Again, a little more than a decade ago, Alberta enjoyed a $35 billion nest egg. That’s long gone, replaced with $30.5 billion in debt, with another $17.7 expected over the next two years. The province’s finances are in free-fall, and the cost of servicing each new billion dollars’ worth of debt will be passed onto future generations. Given these circumstances, the complacency on display in yesterday’s budget is nothing short of remarkable.