By Ben Eisen
and Steve Lafleur
The Fraser Institute
“We are in a different situation than we were six months ago,” said Finance Minister Joe Ceci after unveiling Alberta’s 2016 budget. He’s right. Alberta’s fiscal outlook has worsened dramatically since the government’s October 2015 budget. The province now faces larger and sustained budget deficits with no plans for a balanced budget in sight.
The budget was an opportunity for the provincial government to recognize the deterioration in provincial finances and adjust spending plans accordingly. Instead, it decided to double down on spending – the root cause of its fiscal problems – and accelerate the rate of spending growth.
Back in October, the government planned to increase program spending at an annual average rate of 2.3 percent over the rest of its mandate. Now, despite the deterioration in Alberta’s circumstances, the new budget increases the rate of spending growth to an average annual rate of 3.6 percent.
The combination of worsening economic conditions and the government’s refusal to change course on spending means Alberta will rack up debt more quickly, with a projected budget deficit of $28.9 billion over the next three years. For context, that’s roughly 50 percent more than currently sits in the Heritage Fund, a “nest egg” that took decades to build.
With these large deficits, provincial debt will increase dramatically and the province will return to a net debt position (its debts will exceed its financial assets) this year for the first time since 1999/00. By 2018/19, net debt will reach $33.2 billion – about $7,500 for every Albertan.
All this debt comes at an immediate cost. Interest payments are set to jump from $775 million to $2 billion. Higher interest payments mean fewer tax dollars available for things Albertans care about including healthcare, education and social services.
Nonetheless, some say increased spending growth is necessary to help the economy grow, and that reducing and reforming spending would hurt Alberta’s economic prospects. But [popup url=”http://www.fraserinstitute.org/studies/fraser-forum-may-2010-20082009-recession” height=”1000″ width=”1000″ scrollbars=”1″]research[/popup] casts serious doubt on the ability of increased government spending to actually spur growth.
And Alberta’s own history provides an important blueprint for how to address its current fiscal situation – a blueprint at odds with the budget’s approach. Back in 1993, after several failed attempts of the passive “wait and hope” approach, Ralph Klein’s government set in motion a bold plan to balance the budget with an ambitious reform program, which led to a 22 percent reduction in program spending over three years.
While these were difficult times for many Albertans, the tough choices were necessary and produced a remarkable fiscal turnaround, with the deficit being erased in just two years, followed by a string of surpluses that allowed the province to quickly eliminate its net debt.
Did these spending reductions cause the economy to contract, as some suggest spending restraint would today? Hardly. In fact, between 1993 and 1997, Alberta’s economy grew faster than the rest of the country.
More broadly, Canadian history suggests successful efforts to eliminate deficits (from governments of all political stripes) often focus on spending control. This is consistent with international empirical economic research[/popup] that shows spending reform is more effective and less costly, in terms of economic growth, than efforts to eliminate deficits through tax hikes.
Governments make spending decisions in light of economic conditions and fiscal realities. The Alberta government’s spending plan, unfortunately, doubles down on an approach that led to its current fiscal predicament and ignores evidence of what actually works. Albertans will pay the price for the decisions made in this budget for years to come.
Ben Eisen, Charles Lammam, and Steve Lafleur are analysts with the Fraser Institute.