How Texas avoided big deficits when oil prices fell

A common myth holds that the deterioration of Alberta’s finances in recent years was inevitable due to falling commodity prices. After all, Alberta is an energy economy and, so the narrative goes, big deficits are inevitable when oil prices decline.

This narrative doesn’t withstand scrutiny. Other energy jurisdictions weathered the ongoing storm of low oil prices while keeping their government books in much better shape than Alberta’s. For example let’s compare Alberta to Texas.

Like Alberta, Texas is a generally prosperous jurisdiction with a large energy sector. Also like Alberta, Texas enjoyed a prolonged period of strong economic growth (albeit with some big bumps along the way, especially around 2009) between 2004 and 2014.

Despite these similarities, Texas today does not face the same kind of daunting budget deficits as Alberta. In fact, Texas has run budget surpluses in recent years, including last year when oil prices were very low.

The reason? When times were good between 2004 and 2014, the Texas government exercised much more discipline when it came to government spending. Consider that over the course of the 2004-2014 period, per person program spending (adjusted for inflation) in Alberta grew by 49 per cent compared to just 37 per cent in Texas.

The result—in 2004/05 Alberta’s per person spending was 68 per cent higher than Texas. By 2013/14, that gap had grown to 83 per cent.

There are a number of reasons why Alberta’s spending increased faster including a much more rapid expansion of the province’s government workforce. Over the same 10-year period, public-sector employment growth in Alberta averaged 2.6 per cent annually, more than twice the growth rate (1.2 per cent) in Texas.

Partly as a result of these different spending choices, Alberta’s financial position deteriorated rapidly in recent years with projections of a rapid run-up in debt in the years ahead. By contrast, Texas’ overall financial position has been, and is expected to remain, stable. In fact, Alberta’s net debt per person is expected to exceed $7,000 per person by fiscal year 2018, dwarfing the per person debt burden in Texas.

In short, Alberta and Texas both enjoyed a prolonged economic boom, and both economies took a hit due to the drop in energy prices. But the Texas government’s books are in relatively good shape, while Alberta’s government is digging a hole that will take some time to get out of.  In short, while Alberta’s government chose higher spending and more debt, Texas made the opposite choice.

The narrative that the big deficits and run-up in debt now occurring in Alberta were unavoidable consequences of a fall in energy prices doesn’t withstand scrutiny. If Alberta spent more prudently over the past decade, its financial position would be dramatically stronger today. Rather than professing helplessness and blaming factors beyond their control, policymakers in Alberta should learn from jurisdictions such as Texas where the government lives within its means.