Fraser Forum

Alberta’s downgrade is a wakeup call to change course

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Today, Standard and Poor’s downgraded the Alberta government’s credit rating in part due to “concerns of weak budgetary performances and rising debt burden.” This remarkable development underscores just how badly Alberta’s fiscal position has deteriorated in recent years. But in many ways, this is not surprising, as the writing was on the wall.

After all, the government’s latest budget forecasts a $6.1 billion operating deficit for this fiscal year and deficits for the next three years, totalling $11.9 billion.  This comes after six deficits in the past seven years.
Not long ago, in 2007/08, Alberta enjoyed a net financial asset position of $35 billion, where its financial assets exceeded the value of government debt. However, its financial position quickly deteriorated as the province started to run persistent deficits. Currently, net financial assets are projected to be just $3.4 billion.

Starting next year, in 2016/17, Alberta will fall into a net debtor position for the first time in more than 15 years. By 2017/18, net debt is projected to reach $13.7 billion—that’s a $48.8 billion swing in the span of about a decade.

Some commentators, including Finance Minister Joe Ceci, blame low oil prices for Alberta’s fiscal woes, but this story doesn’t hold up to scrutiny. The deterioration in Alberta’s financial position has been in progress for years. In addition, 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.

The real culprit for Alberta’s fiscal problems—and ultimately today’s credit downgrade—is several years of rapid spending growth by successive governments.

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 surplus this year instead of a deficit. A similar result was found had the government limited spending increases more modestly, to the growth rate of the provincial economy.

Today’s S&P downgrade is another sign of the severity of Alberta’s fiscal problems. It should serve as a wakeup call for the government to act and change course by working to reduce and reform government spending.


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