Lessons from Klein era can help Kenney repair Alberta government finances

Lessons for Fiscal Reform from the Klein Era

Summary

• Alberta is facing serious fiscal challenges, including a historic deficit and rapid debt accumulation that extend beyond the COVID shock. This is not the first time Alberta’s finances have been in trouble. Today’s situation has parallels to the early 1990s, when Alberta faced some of the largest deficits in its history.
• In both instances, governments relied on high natural resource revenues to finance high spending and avoid large deficits. In both periods, once natural resource revenues dried up and could no longer support high spending, the province began to incur large deficits.
• To tackle Alberta’s deteriorating fiscal position in the early 1990s, the Klein government introduced swift, broad-based spending reductions. Real (inflation-adjusted) per-person program spending was reduced from $11,040 (1992/93) to $7,447 (1996/97)—a reduction of approximately $3,600 per person. As a result, the Klein government quickly balanced the budget and reduced net debt—despite relatively low natural resource revenues over the period. These reforms set the stage for nearly a decade of fiscal stability.
• Since the end of Klein reform era (1999/00), governments have routinely increased program spending beyond the level needed to account for inflation and population growth, and well beyond pace of revenue growth. In 2020/21, per-person program spending will reach an estimated $13,644.
• The Klein-era reform in the early 1990s introduced a distinct shift in fiscal policies and outcomes, which may present important lessons for Alberta today.