Alberta’s budget does not strike at root of province’s fiscal problems

There’s no question that Premier Rachel Notley and her government were dealt a tough hand upon taking office when it comes to the state of provincial finances. Rapid spending increases by successive Progressive Conservative governments left Alberta’s finances in a vulnerable position. When oil prices finally fell and government revenues took a hit, the province found itself in a difficult position with expenditures at a very high level and badly misaligned with revenues.

Notley’s NDP government certainly did not create the fiscal mess in which Alberta now finds itself, but it is nonetheless responsible for cleaning it up. Unfortunately, today’s budget failed to strike at the root of the province’s fiscal problem, avoiding decisive action to reform and reduce spending. In fact, the province has actually committed to continued spending growth over the course of its fiscal plan.

Before going further, let’s dispel the notion that the fiscal problems now facing the province are an inevitable consequence of the recent decline in oil prices. While government revenues have taken a big hit as a result of this decline, the reality is that the province would be in a much better position to absorb this hit had it controlled spending over the past decade or so when oil prices were high and revenues flowed strongly into provincial coffers.

Consider that since 2004/05, provincial government program spending has approximately doubled. If the government had increased spending during this period but at a more prudent pace, matching the rate of inflation plus population growth, Alberta would be spending approximately $10 billion less today than is in fact the case. Coincidentally, this gap between prudent spending growth and reality is almost exactly as large as the government’s projected deficit this year ($10.4 billion).

In other words, if successive Alberta governments had increased spending more prudently since 2004/05, the province would have essentially balanced the budget this year, despite the collapse in oil prices and the resulting drop in government revenues. Instead, successive governments repeatedly increased spending at a rate faster than inflation plus population growth, as though the good times of high oil prices would never end. When the boom went bust, government finances were not prepared to absorb the blow.

Unfortunately, today’s budget fails to recognize the ultimate cause of Alberta’s fiscal problems and does not take meaningful action to reform and reduce provincial spending. In fact, the budget presents a plan to increase spending in the years ahead (at a faster pace than in the past two years) despite the harsh fiscal realities facing the province.

Alberta needs a plan that reforms and reduces spending, and there are important upcoming opportunities for the government to achieve savings. For example, there are 175 collective bargaining agreements with public-sector employees coming up for negotiation in the near future. Considering that public-sector workers currently earn a wage premium (and higher non-wage benefits) than comparable private-sector workers, these negotiations should be viewed as an opportunity to reduce expenditures by bringing public-sector wages and benefits in line with private sector norms for similar positions.

Since public sector compensation consumes about half of all provincial government spending, reform in this area can potentially bring meaningful savings.

Given the harsh fiscal challenges facing the province and the evidence that sustained spending growth over the past decade is largely responsible for creating those challenges, the need to reform and reduce provincial spending is clear. Unfortunately, the government’s recent budget comes up short in this crucial area.