To limit the debt, Alberta must restrain spending

This year, Alberta’s government will return to a net financial debt position for the first time since 1999/2000. It remains an open question, however, exactly how much debt Alberta will accumulate.

Public attention has focused on the possibility that lower-than-expected government revenues may lead to increased debt.

However, another factor—the extent government is able to restrain spending—will also help determine the speed at which Alberta acquires debt. If the government fails to exercise spending restraint, the province will add billions more in debt.

In a recent study, we analyze how the government’s spending choices will shape provincial debt accumulation.

Based on the government’s latest spending and revenue projections, the province is on pace to accumulate $19.8 billion in net debt by 2019/20. Given that the finance minister has already said next year’s deficit will be $5 billion larger than expected, we can conservatively revise this projection upward by this amount. This means the government expects to accumulate $24.8 billion in debt. That’s just under $5,500 per Albertan.
 
Some analysts note that the government may pile up even more debt if the government’s optimistic revenue projections don’t materialize. This is indeed an important risk. However, even if the government’s revenue projections do pan out, it’s critical to recognize Alberta will rack up more debt than expected if the government fails to manage spending prudently.

For example, if the government increases spending at the same rate as the provincial economy is expected to grow between now and 2019/20 (4.7 per cent annually), the province will accumulate $36.1 billion in net debt by 2019/20. That’s roughly $8,000 per Albertan, 46 per cent more than currently expected.

Given that Alberta’s program spending increased at a significantly faster rate than economic growth between 2004/05 and 2014/15, and that the current government increased spending for 2015/16 beyond what had been budgeted, there are no guarantees the government will hold spending significantly below GDP growth. However, if the government does increase spending at this rate, the result will be an even bigger increase in debt than currently projected.

Similarly, the government can help reduce the rate of debt accumulation if it holds program spending increases below the rate of growth set out in the October budget.

For example, if the government froze program spending at 2015/16 levels, Alberta would only accumulate $11.8 billion in debt by 2019/20. That’s less than half as much as currently expected.

While zero growth may seem an ambitious goal, it should be considered in the context of recent rapid spending growth. Considering that program spending increased by 98.3 per cent between 2004/05 and 2014/15, an adjustment period of zero growth or very close to zero growth may be achievable. It may also be prudent, given the harsh fiscal realities facing the province.

The possibility of rapid debt accumulation should be of concern to Albertans because the cost of servicing that debt will leave less money available for other priorities such as health care, education or tax relief.

Examples from elsewhere in Canada demonstrate that debt service costs can take a significant bite out of government budgets. Consider that Ontario and Quebec spend between nine and 10 cents respectively out of each dollar in revenue collected just to service their debt.

Currently, Alberta is not similarly burdened with large debt service payments. But if the province racks up more debt than expected, more taxpayer dollars will be spent on debt service, leaving less available for other priorities.

While the government has no control over commodity prices, and limited direct control over the trajectory of revenue growth, it has significant control over spending. The spending choices it makes will have a substantial effect on how much debt is passed along to future Albertans who will have to repay these debts—with interest.