Oil prices aren’t to blame; Alberta’s budget misdiagnoses the problem
If the first step towards remedying a problem is admitting that you have one, Alberta is a long way away from fixing its budget woes. Indeed, Finance Minister Joe Ceci took every opportunity in his recent budget speech to blame the recent decline in oil prices for the province’s fiscal challenges, saying, for instance, that “Albertans know that lower oil prices mean deficits.” That is a serious misdiagnose of the problem.
The real culprit for the deficit is a rapid increase in government spending over the past decade. Successive governments have been unable to control spending when times were good and therefore have been ill prepared for the bad times.
And now, the budget forecasts a $6.1 billion deficit for this fiscal year and deficits for the next three years, totalling $11.9 billion. The province is now on track to run 10 deficits in 11 years. Starting next year, Alberta will fall into a net debt position, where the total value of government debt exceeds financial assets, for the first time in more than 15 years.
Blaming oil prices is a convenient but false narrative. In the past, Alberta has found ways to run surpluses when oil prices were much lower than today (after adjusting for inflation) and failed to balance the budget in years when oil prices were much higher.
Consider that from 1994/95 to 2007/08, Alberta recorded 14 consecutive surpluses with West Texas Intermediate (WTI) oil at an average of roughly $43 per barrel (in 2015 US dollars). Yet over the past eight years, the province has run deficits in all but one year despite oil prices averaging $88 per barrel (in 2015 US dollars). The record simply does not support the notion that low oil prices inevitably lead to deficits.
Spending is the real culprit for the deficit. Between 2004/05 and 2014/15, the provincial government increased program spending by nearly 100 per cent—almost double the combined rate of inflation and population growth (52 per cent) and faster than the growth of the overall economy (89 per cent).
A recent Fraser Institute study found that had the provincial government limited spending increases since 2004/05 to keep pace with inflation and population growth, the province would enjoy an estimated surplus of $4.4 billion this year instead of a deficit. Even limiting spending increases more modestly, to the growth rate of the provincial economy, would have allowed Alberta to enjoy a $1.9 billion surplus.
Rather than strike at the root of the problem, Alberta’s budget proposes to dig an even deeper hole with further spending increases. Program spending is projected to increase this year and each successive year up to 2017/18, which is the latest year delineated in the budget plan. Specifically, program spending will increase 3.1 per cent this year, 2.2 per cent in 2016/17, and 1.6 per cent in 2017/18.
And what’s worse, the budget proposes the wrong solution. In an attempt to close the deficit, the government is proposing new tax increases (on fuel, tobacco, alcohol, and insurance premiums) on top of the personal and corporate income tax hikes that came into effect earlier this year.
Those tax hikes will impose a harsh blow to Alberta’s competitiveness, particularly on an already struggling economy. And they are not guaranteed to generate the expected amount of new revenue—the reason being that individuals, particularly upper-income earners, will change their behaviour and find legal ways to reduce the amount of additional tax they pay. This could mean larger deficits and more debt than already planned.
While Alberta’s budget didn’t contain any major surprises, it failed to identify the source of the fiscal problems plaguing the province. Further, the policy solutions it proposes are ill-advised and will make matters worse. Alberta’s current fiscal predicament stems from successive governments being unable to control spending. Blaming external forces distracts from the choices that have led multiple provincial governments down the path of persistent deficits.
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