Notley government must change course to avoid more red ink

The Notley government in Alberta took office facing severe fiscal challenges.  Unfortunately, this week’s fiscal update from Alberta Finance Minister Joe Ceci shows that the new government’s early actions have made a bad fiscal situation worse. To stem the tide of red ink, the government should change course and restrain provincial spending.

Notley’s government inherited a fiscal mess. Their predecessors’ budget from March forecasted the province would run an unprecedented $5 billion operating deficit this year. However, rather than moving to restrain spending and trim the deficit, the new government immediately announced $624 million in new spending over and above the March budget on health, education, and social assistance.

Overall spending is now projected to increase by $1.8 billion from the March budget. Some new spending (disaster assistance, for example) was unavoidable. However, most of the increases were discretionary.

The predictable consequence of increased spending came to pass this week when the government announced that the operating deficit is now projected to be $5.9 billion—18 per cent larger than was anticipated in March.

This increase in the projected budget deficit is troubling enough, but there’s reason to worry the deficit could grow even larger. The finance minister noted that unless energy prices increase, the deficit may climb as high as $6.5 billion. Furthermore, evidence from other jurisdictions suggests income tax increases on high earners, which will come into force in Alberta on Oct. 1, often bring in considerably less revenue than expected. If revenues from the income tax hikes are lower than projected, the deficit will grow larger still.

Troublingly, the early actions of the new government in Alberta resemble the policy choices of Bob Rae’s government in Ontario during the early 1990s. Like Notley’s government, the Rae government inherited a large deficit from its predecessor. In response, it increased spending by 12 per cent in its first year, causing the deficit to grow even larger. As a result, Ontario continued to run large deficits, causing the province’s debt load to nearly double as a share of GDP.

The failure of the Rae government’s approach to deficit reduction perhaps wasn’t surprising. Historically, most successful attempts at large-scale deficit reduction have involved significant spending reform and restraint.  Efforts to eliminate large deficits by hiking taxes without material spending restraint rarely succeed.

Some may argue that it’s unrealistic to expect spending restraint from a newly elected NDP government, but this argument ignores history. Each of Canada’s major political parties has produced governments that eliminated large deficits by reforming government spending.
 
For example, in Saskatchewan, Roy Romanow’s NDP government in the 1990s cleaned up an even worse fiscal mess than Alberta faces today. Romanow did increase some taxes, but he also reined in spending immediately upon taking office, ultimately cutting program spending by 10 per cent over three years. Romanow’s spending discipline eliminated the deficit and placed Saskatchewan on stable fiscal footing, creating conditions that soon allowed for substantial tax relief.

Federally, the Chretien Liberals provide another instructive example. The party campaigned on a platform of spending increases, which under-estimated the severity of the country’s fiscal situation. When reality set in, the government undertook a program review that lead to spending cuts that balanced the budget. The Chretien government’s change of direction reflected a recognition that governments, like families, must set their priorities based on their circumstances, rather than their desires.

If Notley’s government is serious about deficit reduction it should consider a change in fiscal course and reform and restrain spending, just as Romanow’s NDP did in Saskatchewan. But if Notley’s government continues its approach of higher taxes and higher spending, Albertans will likely witness more announcements from the finance minister reporting that the province’s fiscal position continues to deteriorate.