Why Alberta can’t get a handle on its chronic deficits

The fundamental problem in Alberta is that spending growth over several years exceeds revenue growth

By Steve Lafleur
and Ben Eisen
The Fraser Institute

VANCOUVER, B.C. Jan. 30, 2017/ Troy Media/ – Finance Minister Joe Ceci recently mused that Alberta’s 2016-17 deficit may be lower than the eye-popping $10.8 billion projected in the Second Quarter Fiscal Update, due to higher than expected oil prices.

Higher oil prices and a slightly reduced deficit would, of course, be welcome. But it will not be nearly enough to balance the budget. Indeed, the provincial government knows this – the finance minister has stated the budget will not be balanced until 2024.

Instead of simply watching oil prices and hoping they shrink the deficit, the government should work to eliminate the deficit quickly by focusing on what it can control: program spending.

alberta deficits
Steve Lafleur

Alberta’s budgetary troubles are well publicized, but unfortunately the root causes of the province’s persistent deficits are misunderstood.

While low oil prices contribute to this government’s deep budget deficits, it’s important to recognize that this will be Alberta’s eighth deficit in nine years. During many of those years, oil prices were at historically high levels. For example, in 2012-13 when oil prices averaged a little over US$97 a barrel (adjusted for inflation), the province still ran a $3.1-billion deficit.

The underlying problem is that even in years when the treasury was flush with revenue, the provincial government spent more than it collected. Again, spending, not fluctuations in commodity prices, are to blame for the province’s persistent deficits.

deficits alberta
Ben Eisen

A recent Fraser Institute study shows that Alberta’s provincial program spending (all spending other than interest payments) went from $24 billion in 2004-05 to $48.2 billion in 2015-16 – a 100.5 per cent increase. Had spending growth merely kept pace with population growth and inflation, program spending for 2015-16 would have been $9.2 billion lower, easily wiping out the $6.4-billion deficit.

The fundamental problem is that spending growth over this period has been faster than revenue growth, and faster than other key economic metrics. Over the period examined, spending grew briskly, at an average annual rate of 7.1 per cent. By comparison, revenue grew at an average annual rate of 4.6 per cent. With spending growing so much faster than revenue, it’s not hard to see why consistent deficits emerged.

Unfortunately, the current government is making the same mistake. In 2016-17, the first full fiscal year for Premier Rachel Notley’s government, program spending will increase by 7.5 per cent, slightly more than the 7.1 per cent average between 2004-05 and 2015-16. Excluding the costs associated with the Fort McMurray wildfires, the increase is closer to 5.4 per cent.

Critically, despite the big deficit facing the province, spending growth in 2016-17 is projected to significantly outstrip the combined rate of inflation and population growth, which is expected to be three per cent. Imprudent spending growth beyond this metric by previous governments created the province’s fiscal mess. And this government is making the same mistakes.

Running up debt today will burden future generations of Albertans, who’ll be responsible for servicing and/or repaying it through their taxes. The government in Edmonton has the power to avoid this outcome, but only if it’s willing to tackle Alberta’s long-standing spending problem.

Steve Lafleur and Ben Eisen are analysts at the Fraser Institute.

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