Alberta economy recovering from COVID but government finances remain cause for concern

Finally, some good news for Albertans. After contracting by 8.2 per cent in 2020 (inflation-adjusted), Alberta’s economy is expected to recover from the COVID recession by 2022 (even though the economy still hasn’t fully recovered from the 2014 recession), employment has nearly returned to its pre-COVID level (February 2020) and oil prices (West Texas Intermediate, the international benchmark) are up from last year, trading above $60 (U.S. per barrel).

But unfortunately, Alberta’s government finances also took a major hit from the COVID recession. The provincial budget deficit—the difference between government revenue and spending annually—soared from a projected $6.8 billion to $20.2 billion in 2020/21. Subsequently, the Kenney government’s plan to a balance the budget by 2022/23 was quickly thrown off course.

To be clear, Alberta was incurring persistent deficits and accruing significant debt well before COVID. The province has incurred a deficit every year since 2008/09 (excluding 2014/15) and net debt (total debt minus financial assets including the Heritage Fund) was already $40.1 billion in 2019/20.

Add in the pandemic and net debt will reach a projected $102.1 billion by 2023/24. Albertans pay interest payments on this debt, which will cost $3.3 billion in 2023/24. For context, that’s more than half of what the government expects to spend on social services that year. Every dollar that goes towards debt interest payments is a dollar no longer available for important programs and services including health care, education or tax relief.

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

In Budget 2021, after its original plan was brutally thrown off course, the Kenney government postponed a path to budget balance to be re-established post-pandemic, which is reasonable given the level of uncertainty at the time.

It’s critical, however, that the Kenney government stick to its commitment to chart a path to balance as this crisis passes. Otherwise, the province will continue to accumulate debt while Albertans face the consequences.

Reining in COVID-related spending will be the first step, but the Kenney government must also tackle the underlying fiscal problems that existed pre-COVID, including uncontrolled government spending. After adjusting for inflation, program spending (total spending minus interest costs) increased from $9,177 per person in 2000/01 to $13,198 in 2019/20—again, that’s before the main impact of COVID. Put differently, after adjusting for both the general rise in price levels and population growth, program spending still increased by more than $4,000 per Albertan. And critically, Alberta’s high spending has generally not translated into better public services.

Alberta’s economy may be on its way to recovery, but the province’s fiscal challenges are far from over. The Kenney government must chart a course to budget balance as the pandemic passes.