Alberta's finances: Welcome back to the 1980s

In his 1988 budget speech, then Alberta Finance Minister Dick Johnston proclaimed the “government’s fiscal strategy of providing major stimulus worked.” He said a “solid recovery” had begun and forecast a return to balanced books three years out.

If that sounds familiar, it’s because in Budget 2011, Alberta’s newest finance minister, Lloyd Snelgrove, just channeled the 1980s-era minister: “We had a plan that got us through the recession and we will stick to it as government revenue now begins to recover,” said Snelgrove in his budget speech. He also forecasts a balanced budget three years out.

Alberta’s politicians have a habit of budgeting based on the assumption that boom-time revenues are permanent. They also have the tendency to not recognize overspending has created structural deficits. For example, in 1981/82, real program spending was $9,183 per capita; that jumped to $11,383 by 1985/86. That set Alberta up for massive deficits once resource revenues declined.  

Similarly, after ratcheting back real per capita program spending later in the 1990s (it hit a low of $6,434 in 1996/97), such spending rose in most of the following years to reach $9,260 in 2006/07. But a few years of exceptional natural resource revenues led Alberta’s government into temptation and per person program spending went even higher, to $10,134 by 2008/09. Akin to the 1980s, such dramatic increases in just program spending (never mind capital expenditures which are also up sharply) set the province up for red ink once resource revenues moderated.  

Thus, in addition to billions in red ink in the past two fiscal years, Alberta’s government forecasts another $8.9 billion in deficits between the year just ending and the targeted surplus in 2013/14.

But there are potential pitfalls for Snelgrove’s three-year estimate just as there was in the late 1980s for another finance minister. For one thing, the province assumes marginal increases in program spending over the next three years to $40.1 billion in 2013/14 from a forecast $38.4 billion in 2010/11. But containing spending is generally not something the Alberta government has been adept at as of late.

Another significant problem is found in the province’s assumptions used to arrive at balanced books. For example, the province hopes a barrel of oil (WTI) will be worth $95.75, that gas will be $5.00/gj, and that the Canadian dollar will be worth 98 cents U.S. in 2014.

Perhaps. But beyond the foregoing, the finance ministry wouldn’t release its sensitivity assumptions to me for 2014. Thus, I’m forced to do a back-of-the-envelope calculation using sensitivity assumptions for the 2011/12 budget. Based on those, if in 2014, oil is five dollars less than predicted, if gas is just $4.50, and if the Canadian dollar is worth 98 cents U.S.,  revenues will be $1.6 billion less than expected. That would turn a predicted 2013/14 $1.2 billion surplus into a $400-million deficit—even if the province can hit its spending target that year.  

The upshot is this: As in the 1980s, Alberta is again eroding its net financial assets. In 1985, those assets were worth $12.6 billion but the subsequent nine years of deficits eroded the province’s position and led to a net debt of $8.3 billion by 1994. That was an almost $21 billion deterioration in nominal terms.  

The same thing is happening now. Alberta’s net financial assets hit a high of $39.4 billion in 2007/08 but are forecast to decline to $19.3 billion by 2013 (and that excludes pension liabilities which worsen the picture.) That’s a $20 billion deterioration in nominal terms.

That’s not as severe a decline as in the last deficit era, especially after inflation, but it’s the trend that counts and we’re at the beginning. Halting that decline will depend on whether the finance minister’s wish for a balanced budget by 2013/14 materializes. (Gentlemen, place your bets.)

Missing from Budget 2011 was the question of how to balance the books if revenues are less than expected. Wages, benefits and salaries are the largest part of any government’s budget (once the health care and education sectors are included and not just direct ministry employees). If Alberta is to balance the budget any time soon, such expenses must be part of any balanced budget program. That and other options should be on the table.

While history is not guaranteed to repeat itself, the last time Alberta started to run deficits, the early predictions of soon-to-be-balanced books were continually off. Instead, the province ended up in red ink for nine consecutive years. In Alberta’s newest deficit era, we’re now looking at a minimum of five years.