Alberta credit downgrade a wake-up call to change course

The recent credit downgrade by Standard and Poor’s is another sign of the severity of Alberta’s fiscal problems

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CALGARY, EDMONTON, ALL SASKATCHEWAN MEDIA EXCEPT REGINA, SASKATOON OUT

By Steve Lafleur
and Charles Lammam
The Fraser Institute

VANCOUVER, B.C. Jan 4, 2016/ Troy Media/ – Alberta Finance Minister Joe Ceci was handed some disappointing news in advance of the holidays. Standard and Poor’s, a prominent government credit rating agency, [popup url=”http://calgaryherald.com/news/politics/alberta-credit-rating-downgraded-by-sp” height=”600″ width=”600″ scrollbars=”0″]downgraded[/popup] Alberta’s rating, citing weak budgetary performance and a rising debt burden. This remarkable development underscores just how badly Alberta’s fiscal position has deteriorated in recent years.

In many ways, last week’s downgrade is not surprising as the writing was on the wall. In late October, two other credit rating agencies warned that years of budget deficits threatened to undermine the provincial government’s credit rating. That concern was quickly  dismissed by the government at the time.

Reality should now be setting in, signalling that a change in fiscal course is needed.

After all, the government’s latest [popup url=”http://finance.alberta.ca/publications/budget/budget2015-october/fiscal-plan-complete.pdf” height=”600″ width=”600″ scrollbars=”0″]budget[/popup] forecasts a $6.1 billion operating deficit for this fiscal year and deficits for the next three years totalling $11.9 billion. This comes after six deficits in the past seven years.

Not long ago, in 2007/08, Alberta enjoyed a net financial asset position of $35 billion, where its financial assets exceeded the value of government debt. However, its financial position quickly deteriorated as the province started to run persistent deficits. Currently, net financial assets are projected to be just $3.4 billion.

Starting next year, in 2016/17, Alberta will fall into a net debtor position for the first time in more than 15 years. By 2017/18, net debt is projected to reach $13.7 billion – that’s a $48.8 billion swing in the span of about a decade.

Some commentators, including Minister Ceci, blame low oil prices for Alberta’s fiscal woes, but this story does not withstand scrutiny.

For starters, the deterioration in Alberta’s net asset position has been in progress since 2007/08, long before the recent slide in oil prices began. In addition, in the past Alberta has found ways to run surpluses when oil prices were [popup url=”https://www.fraserinstitute.org/article/don-t-blame-oil-prices-for-alberta-s-deficit” height=”600″ width=”600″ scrollbars=”0″]much lower[/popup] than today (after adjusting for inflation) and it has failed to balance the budget in years when oil prices were much higher.

Consider that from 1994/95 to 2007/08 Alberta recorded 14 consecutive surpluses with West Texas Intermediate (WTI) oil at an average of roughly $43 per barrel (in 2015 U.S. dollars). Yet over the past eight years, the province has run deficits in all but one year despite oil prices averaging $88 per barrel (in 2015 U.S. dollars). The record simply does not support the notion that low oil prices inevitably lead to deficits.

The real culprit for Alberta’s fiscal problems – and ultimately the recent credit downgrade – is several years of rapid spending growth by successive governments.

Between 2004/05 and 2015/16, the provincial government increased program spending by 104 per cent – almost double the combined rate of inflation and population growth (56 per cent) and much faster than the growth of the overall economy (72 per cent). Such spending growth is hardly prudent.

In fact, a recent Fraser Institute [popup url=”http://www.fraserinstitute.org/sites/default/files/albertas-budget-deficit-why-spending-is-to-blame.pdf” height=”600″ width=”600″ scrollbars=”0″]study[/popup] found that had the provincial government limited spending increases since 2004/05 to keep pace with inflation and population growth, the province would enjoy surplus this year instead of a deficit. A similar result was found had the government limited spending increases more modestly, to the growth rate of the provincial economy.

The recent credit downgrade is another sign of the severity of Alberta’s fiscal problems and should serve as a wake-up call for the government to act and change course by working to reduce and reform government spending.

Steve Lafleur is a senior policy analyst and Charles Lammam is director of fiscal studies at the Fraser Institute.

Steve and Charles are Troy Media contributors. [popup url=”https://www.troymedia.com/become-a-troy-media-contributor/” height=”600″ width=”600″ scrollbars=”0″] Why aren’t you?[/popup]


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