Cash from Ottawa won’t solve Alberta’s deficit problems

Printer-friendly version
Appeared in the Edmonton Journal, February 9, 2016

The federal government recently announced that it may provide up to $250 million to the Province of Alberta under a little-known fiscal stabilization program meant to assist provinces that see sharp declines in government revenue.

There’s no doubt that low oil prices have hit the province’s bottom line, but this decline in revenue isn’t what’s driving Alberta’s fiscal troubles, and some extra cash from Ottawa won’t solve them. Instead, the government should strike at the root of Alberta’s deficit problem by reforming and reducing provincial spending.

Taking a slightly longer term view provides useful context for evaluating the claim that Alberta’s fiscal problems are the result of a lack of revenue. Yes, revenues for 2015/16 will be significantly below where they were in 2014/15—but they are still above 2012/13 levels. It’s difficult to argue that the provincial government needs federal aid to pay its bills because its revenues have fallen from the peak reached in the past two fiscal years, which happened to have unusually high resource prices.

Despite the fact it is going through a very difficult patch, Alberta remains a wealthy province that generates enough tax revenue and resource royalties to provide high-quality public services. On average, wages in Alberta are still substantially higher than in the rest of the country, and the unemployment rate is closely aligned with the national average.

Clearly, the problem is not that Alberta’s economy is too weak to generate enough revenue to fund public services without emergency assistance. The real problem is that when oil prices were high over the past decade, the provincial government spent money as though it believed resource prices were no longer cyclical and would stay high forever. Now that prices have returned to Earth, the province finds itself with an unsustainable level of government spending.

Consider that in the decade between 2004/05 and 2014/15, Alberta’s provincial government increased program spending by nearly 100 per cent. For context, that’s about twice the combined rate of inflation plus population growth. Given this rate of spending growth, it’s no wonder the government finds itself staring at a huge budget deficit now that oil prices have dropped.

This is why the government in Edmonton should focus on getting spending under control, not on finding new sources of revenue—whether in the form of handouts from Ottawa or further tax increases as some suggest.

Unfortunately, the new government’s early actions made the problem worse, not better. Despite the worsening resource price outlook, in October Alberta Finance Minister Joe Ceci rolled out nearly $7 billion of new spending over and above the March budget for the 2015/16 through 2017/18 fiscal years. Hopefully the recent wage freeze for public-sector managers and non-unionized public employees is a sign that the provincial government has realized it must restrain spending.

In reality, if more money from Ottawa was the solution to Alberta’s fiscal problems, they would already be fixed. Major federal transfers to Alberta’s provincial government have increased by 146.1 per cent between 2005/06 and 2015/16, an increase representing billions of dollars annually.

Rather than relying on a federal bailout—which would only cover around five per cent of the projected deficit—the provincial government should re-examine its spending priorities. With 175 public-sector collective agreements covering 50,000 public employees set to expire, the provincial government will have plenty of opportunities to trim spending. Given that public employees in Alberta currently enjoy a 6.9 per cent wage premium over private-sector employees in similar roles (in addition to excellent benefits and job security), there is likely significant room for savings.

Federal action will not solve Alberta’s current budgetary troubles. Prudent fiscal action by the provincial government is necessary to re-align provincial expenditures with provincial revenue. Failure to do so will guarantee Albertans pay for government profligacy later—and with interest.

Subscribe to the Fraser Institute

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