Be warned—Alberta’s government finances remain at risk

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Appeared in the Western Standard, January 15, 2024
Be warned—Alberta’s government finances remain at risk

Amid a windfall in resource revenue, which includes oil and gas royalties, the Alberta government continues to run budget surpluses and pay down debt. But as budget season approaches, if high spending continues the province may fall back into deficit when relatively high resource revenue declines—and it will cost Albertans.

Since 2021/22, when Alberta first returned to a budget surplus, the provincial government has paid off more than $18 billion in net debt (total debt minus financial assets). As a share of the economy, Alberta’s net debt (9.0 per cent) is the lowest across Canada in 2023/24, and the province also enjoys the lowest net debt per person at $8,832.

These are all positive indicators. But the Smith government must be careful not to become complacent. Alberta has a history of running surpluses and paying down debt during the good times of relatively high resource revenue. The problem is that when those resource revenues decline, the province routinely falls into deficits.

Why? To put it simply, high spending.

Indeed, a $1 increase in resource revenue per person (inflation-adjusted) is associated with an estimated 56-cent increase in government program spending the following fiscal year, but a $1 reduction in resource revenue is not similarly followed by a reduction in program spending. In other words, Alberta governments tend to increase spending during periods of relatively high resource revenue, which is unsustainable and results in the province incurring deficits once resource revenues decline.

Consider the most recent string of deficits. In the late 1990s, resource revenue began increasing, and at the same time, the provincial government increased program spending (inflation-adjusted) from $7,393 per person in 1998 to $13,114 per person in 2008. When relatively high resource revenue declined, paired with high spending levels, the province began to incur routine budget deficits, which lasted from 2008/09 to 2020/21. Over the period, Alberta’s finances deteriorated by nearly $95 billion.

That debt accumulation came with great cost to Albertans. Indeed, everyday Albertans are ultimately responsible for financing such debt through interest payments. For perspective, the cost of servicing the province’s debt increased from $61 per Albertan in 2007/08 to a projected $672 per Albertan in 2023/24. That’s money no longer available for important priorities such as health care, education or tax relief.

Unfortunately, the Smith government has shown signs of repeating past mistakes. At every turn, and as relatively high resource revenue has continued, it has increased the spending plan. Again, as history has shown, that puts the province at increased risk of budget deficits when luck runs out.

But if the Smith government had held the line on spending it could have put more than $10 billion towards paying off additional debt, implementing tax relief and/or introducing a savings account to help avoid future deficits.

Alberta’s finances appear to be in good shape, but the province isn’t out of the woods yet. To avoid more debt accumulation, the Smith government must rein in spending so it more closely aligns with stable ongoing sources of resource revenue, rather than based on a relatively high onetime windfall.

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