Kenney government’s upcoming budget should avoid past mistakes

The Kenney government will table its next budget tomorrow (Feb. 24). For the first time in a long time, Alberta has received some good news about its government finances. Surging natural resource revenues may lead to a balanced budget next year, an outcome few would have predicted a year ago. But to understand the scale of the damage—and to avoid the same mistakes—the government shouldn’t forget the last 15 years of fiscal freefall.

To recap—in 2007/08, Alberta’s balance sheet was the envy of Canada. The province’s net financial assets exceeded its debts by $39 billion. Every other province was in a net debt position. However, even back then the seeds of Alberta’s financial woes were being sowed. Throughout the decade of the 2000s, as natural resource revenue poured in, spending increased along with it. Successive provincial governments spent as though the good times would never end.

As a result, when the 2008/09 recession hit and revenues fell, Alberta’s elevated government spending levels caused large annual deficits and the province’s overall financial position begin to deteriorate. After another steep recession in 2015/16 and tepid recovery, the province’s net asset position of $39 billion had been erased entirely and Alberta found itself in a net debt position for the first time since the 1990s. After yet another recession in 2020 during the pandemic, coupled with an inability (or unwillingness) to reduce spending, as of fiscal year 2021/22, Alberta has run 13 budget deficits in the last 14 years.

While the province runs consecutive deficits, the debt piles up. Back in 2016, we estimated that Alberta’s provincial government debt could hit $36 billion by 2019/20—in fact, debt reached $40 billion that year and has grown to $60 billion in 2020/21. Of course, where there’s debt, there’s debt interest. In 2008/09, debt interest costs were negligible. This year, they’re forecasted to reach $2.5 billion.

All told, scale of this fiscal reversal is immense, with government finances deteriorating by approximately $97 billion over approximately 15 years—or roughly $25,700 per Albertan.

All these data help illustrate the extent of the fiscal damage of the past 15 years. The Kenney government should keep this recent history in mind as it develops the 2022/23 budget, and work to ensure the province does not make the mistakes of the past. Instead of viewing increased revenue as a licence to spend more (as was done throughout the 2000s), the government should resurrect the long-abandoned process of saving money from natural resource revenues to build a capital stock that can produce a stream of revenue over time to help pay for services and keep taxes low. This concept underpinned the creation of Alberta’s Heritage Savings Trust Fund in the 1976. No government has regularly contributed to the Heritage Fund for decades; the current government should resume payments as soon as possible.

The government should also recognize the volatility of natural resource revenues and resuscitate an explicit “stabilization” fund, which once existed but was eventually dissolved, to deposit some portion of resource revenue during good times and withdrawal during bad times.

On the eve of its next budget, as Alberta’s short-term financial outlook improves, the government should remember that the staggering fiscal damage over the past 15 years has been largely the result of decisions made during the last major resource revenue boom.