Another rating agency tells Alberta to take ‘corrective fiscal action’

Printer-friendly version
Appeared in the Calgary Sun, January 22, 2016

Moody’s Investors Service has changed Alberta’s credit rating outlook to negative. While it has left the province’s Aaa credit rating intact—for now—the agency warned that the rating faces “downward pressure if the province fails to execute a fiscal plan that demonstrates an ability to control the expected deterioration of the province's financial health in terms of deficits, debt accumulation and maintenance of liquidity levels.”

This new warning comes one month after Alberta’s credit rating was downgraded by Standard & Poor’s. While the finance minister was pleased to hear that Moody’s hasn’t followed suit, he should not be complacent. Moody’s was clear that “corrective fiscal action” is required to prevent rapid debt accumulation.

This is yet another indication that the provincial government needs to take concerted action to address its deteriorating financial position. The recent S&P downgrade and outlook change from Moody’s are both largely a result of weak budgetary performance in recent years. Consider that in 2015/16, the province is scheduled to run its seventh deficit in eight fiscal years. During this period, Alberta’s net financial position deteriorated by nearly $32 billion, putting the province on track for a return to net debt in the coming fiscal year.  And this was during an era when oil prices averaged $88 per barrel. Given Alberta’s fiscal performance in recent years, when oil prices and resource royalties were high, it’s easy to see why Moody’s and Standard & Poor’s are worried about rapid debt accumulation now that oil prices are down.

So what should the Alberta government do to help prevent runaway debt? The answer is to restrain provincial spending. Between 2004/05, and 2014/15, Alberta increased program spending by nearly 100 per cent—approximately twice the combined rate of inflation plus population growth. A recent Fraser Institute study shows that if the province had increased spending more prudently during this period, at the rate of inflation plus population growth, the province would actually have a budget surplus today despite lower resource revenues.

Unfortunately, in their earliest days in office there were troubling signs that the new government in Edmonton would not strike at the root of Alberta’s fiscal problems (spending), and would instead try to tax its way out of its financial hole. The provincial government increased the corporate income tax by 20 per cent as well as moving from a single 10 per cent personal income tax rate to a five-bracket system with a top marginal rate of 15 per cent—a 50 per cent increase. Even as it was increasing these taxes to try to balance its finances, it was also increasing spending by $1.2 billion– more than the government’s tax increases actually brought in. Clearly, increasing taxes and increasing spending at the same time while in deficit is not an effective strategy for avoiding debt accumulation.

Hopefully the provincial government will recognize the severity of the situation and exercise fiscal restraint. And there are a few encouraging signs that the government may be changing course and beginning to address spending. These signs include the recently announced wage freeze for managers and non-unionized staff within the provincial government as well as hints that the province could slow down some of its spending plans.  Ultimately, much bolder action will be required to reform and reduce spending in Alberta if the province is to prevent a flood of red ink in the years ahead and further bad news from credit rating agencies.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.