Kenney government must continue move towards balanced budget

Pre-recession, Alberta faced serious fiscal challenges. Now, Premier Kenney suggests the provincial budget deficit will be “well north of $20 billion” and warns of a “great fiscal reckoning” on the horizon. To bring stability and sustainability back to Alberta finances, the Kenney government must present a clear path forward in its upcoming fiscal update—expected sometime this summer—to further rein in spending and move towards a balanced budget.

Again, Alberta’s finances were in trouble well before the COVID recession.

Successive governments ran deficits in 10 of the past 11 years. Since 2007/08, Alberta’s finances have deteriorated from a net financial asset position of $35.0 billion to an estimated net debt position of $36.6 billion in 2019/20 (pre-COVID). In fact, Alberta has racked up debt faster than any other large province in recent years.

The problem? Spending growth by successive governments over the past two decades. Largely as a result, Alberta now has by far the highest level of per-person program spending (all spending excluding debt interest costs) of the four largest provinces. In 2018/19, Alberta spent $12,622 per person—that’s 18.5 per cent higher than British Columbia ($10,647), 12.7 per cent higher than Quebec ($11,200) and 20.5 per cent higher than Ontario ($10,472).

Correspondingly, the cost of financing debt increased from $214 million (2007/08) to nearly $2 billion in 2018/19. And every dollar spent on debt interest is a dollar diverted away from important services for such as health care and education, or even tax relief.

Before the recession hit, the Kenney government recognized the significance of Alberta’s fiscal challenges and charted a plan to balance the budget by 2022/23. To achieve this, the 2020 Budget planned to reduce real (inflation-adjusted) program spending by $1,851 per person over four years, a relatively mild reduction compared to past reform budgets, but a marked change in direction nonetheless.

Now, the COVID recession will automatically increase the deficit as revenue declines while program spending increases.

Consider some preliminary numbers. In the original 2020 Budget, the deficit was projected to be $6.8 billion in 2020/21. Recently, Premier Kenney estimated that revenues have fallen by $14 billion this year. Further, the Kenney government has already committed $14 billion for stimulus spending. That’s a total of $28 billion in additional red ink.

To make matters worse, Alberta recently received its third credit downgrade since December, which effectively means that credit markets are increasing the risk premium associated with Alberta’s debt. This signals a potential increase in the cost of provincial borrowing going forward. Put simply, even more taxpayer money will be diverted towards financing the province’s debt, and away from important programs and services for Albertans.

Of course, the government had to prioritize public health and the economy in the face of this pandemic. But the worsening fiscal position cannot be ignored.

The Kenney government cannot stray from its original fiscal strategy. In its upcoming fiscal update, it can address Alberta’s growing debt by presenting a plan to further rein in spending and balance the budget over the next few years.