By Ben Eisen
and Charles Lammam
The Fraser Institute
Many of us are guilty of failing to learn lessons from the past and then going on to repeat avoidable mistakes. Alberta’s 2017 budget is a prime example of this at the government level. Call it a bad case of déjà vu.
Put simply, the Notley government has put Alberta on a fiscal path that has been tried in the province before – and failed miserably. Increasing spending and hoping that energy-related revenues will fill the budget gap has not worked before and likely won’t again. To clean up Alberta’s fiscal mess, history teaches us it will likely require tough decisions that actually reduce and reform spending.
This year’s budget sets out another deficit this coming fiscal year – the ninth in 10 years – with no plan to balance the budget. The result: Albertans will be saddled with another $35 billion in new debt (after accounting for financial assets) over three years and annual interest payments on government debt will more than double.
The government forecasts that the deficit will finally begin to shrink a little bit near the end of the decade, but not because of any spending reform. The budget pins hopes on resource revenues nearly tripling by 2019/20, along with significant new revenue from the expanded carbon tax. Indeed, the fiscal outlook would be much worse if it weren’t for optimistic revenue projections.
Again, if this “wait and hope” approach to overcoming Alberta’s fiscal challenges sounds familiar, it’s because it is.
Throughout most of the 1980s and early 1990s, Alberta repeatedly ran deficits. The governments of the day continued with annual spending increases while hoping for natural resource revenue to grow and fill the budget hole.
This passive approach failed as deficits persisted and the province fell into a net debt position in the late 1980s with government debt exceeding financial assets. In the early 1990s, the province racked up considerable debt.
It wasn’t until 1993, following the election of Premier Ralph Klein, that the government finally set in motion a bold plan to balance the budget, which led to a 22 percent reduction in program spending over three years and the province’s deficit disappearing in just two years. This began a string of surpluses, which allowed the province to quickly eliminate its net debt and eventually build up a nest egg.
At the time, critics warned that these spending reductions would drive the economy into recession. These predictions proved incorrect. In fact, between 1993 and 1997, Alberta’s economy grew significantly faster than the rest of Canada.
What’s more, the Klein government’s spending reforms laid the foundation for tax reforms that ultimately contributed to an extended period of prosperity. These reforms ensured that when resource prices went up, Alberta was well-positioned to boom.
Some, due to political preferences, may be reluctant to look to a Progressive Conservative government for an example of successful fiscal policy. But no political party has a monopoly on smart spending reform. For example in the 1990s Roy Romanow’s NDP government in Saskatchewan reduced program spending by 11 percent over three years, quickly eliminating a large deficit.
Unfortunately, Alberta’s recent budget rejects the model for fiscal consolidation that worked in Alberta and Saskatchewan during the 1990s and largely embraces the unsuccessful passive approach of the 1980s.
The decision to push ahead with further spending increases and hope for revenues to fill the budget gap represents a failure to learn the lessons of Alberta’s past. The results aren’t likely to be much better this time around.
Ben Eisen and Charles Lammam are analysts at the Fraser Institute.