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1990s put Alberta’s fiscal problems into alarming perspective

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1990s put Alberta’s fiscal problems into alarming perspective

The Alberta Budget 2021, tabled today by the Kenney government, projects a $18.2 billion budget deficit next year (2021/22), on the heels on a $20.2 billion deficit in 2020/21. To put such large numbers in context, it’s helpful to compare today’s fiscal challenges to the near-crisis Alberta faced in the 1990s. Then we see the gravity of Alberta’s fiscal situation and the extent of the reforms required to put provincial finances back on a sustainable path.

Consider the level of annual borrowing (deficits) by Alberta’s provincial government. As a share of the provincial economy (GDP), recent deficits are larger than those incurred in the early ’90s. The deficit in 1992/93 reached 4.3 per cent of the Alberta economy compared to an expected 5.4 per cent this coming year.

Deficits add up over time and result in higher provincial debt. Provincial debt—specifically net debt, which adjusts debt for financial assets such as investments in the Heritage Fund—will reach a projected $82.2 billion in 2021/22, which as a share of the provincial economy is 24.5 per cent. That’s also worse than the early ’90s when provincial debt was 15.4 per cent of GDP (1992/93).

Interest costs are another important factor to consider. The government must pay interest on its debt, which leaves less money available for programs and services including health care. In 2021/22, debt-interest payments are expected to consume more than six cents of each dollar in government revenue.

This is lower than the 1990s when debt-interest payments consumed nearly 11 cents of each dollar in revenue (1992/93), but that in part reflects higher overall interest rates at the time. As Alberta continues to accumulate debt, the riskiness of our debt could increase relative to other jurisdictions, which necessitates a higher risk premium and thus higher interest rates.

Critically, the reason for Alberta’s fiscal problems in both the early ’90s and today is overspending relative to the province’s taxes. Specifically, the province increased spending during both these periods at unsustainable rates given the province’s tax rates. This gap between what the province was spending versus what it was collecting was exacerbated by an overreliance on volatile natural resource revenues. Put simply, during good times the province spent at levels that could not be sustained through weaker times.

For example, between 1980/81 and 1992/93, just before the dramatic and successful Klein reforms, government spending (on programs but excluding interest, after adjusting for inflation) grew by 1.7 per cent annually compared to the growth in revenues, which on average (after adjusting for inflation) actually declined by 0.4 per cent.

This gap between growth in revenues and spending repeated itself over the last 20 years. Specifically, between 1999/00 and 2019/20, spending on programs by the Alberta government increased by 4.1 per cent on average annually (after adjusting for inflation) compared to a 2.4 per cent average growth in revenues.

Considering that Alberta’s fiscal situation today appears to be at least as critical, if not more so, than the 1990s, it’s helpful to consider the scale of reforms that were required to repair Alberta’s finances back then. The Klein government implemented extraordinary reforms and reductions in spending to eliminate the budget deficit, reducing nominal program spending by 21.6 per cent over three years beginning in 1993.

By comparing today’s fiscal challenges to challenges in the 1990s, we quickly see the depth of Alberta’s current fiscal problems. While economic and fiscal circumstances remain highly uncertain due in part to COVID-19, the Kenney government will need a bold plan to right Alberta’s fiscal ship once this crisis passes.

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