What to look for in today's Alberta budget

Finance Minister Joe Ceci will unveil Alberta’s long awaited budget today. While Premier Rachel Notley (pictured above) has hinted the budget won’t contain “any big surprises,” there will be many important details to sift through.

How big is the deficit this year?

The First Quarter Fiscal Update projected that the deficit would be $5.9 billion, though Minister Ceci said it could be “in the range of $6.5 billion dollars.” That's up from the $5 billion projected in the March budget.

When does the government plan to balance the budget?

This year Alberta will record its seventh deficit in the last eight years. While the Notley government’s campaign platform called for a return to a balanced budget by 2018/19, it recently announced the budget would not in fact be balanced until 2019/20. That could mean 10 budget deficits in 11 years.

How soon until Alberta is back in debt?

Alberta’s net asset position has declined from a high of $35 billion in 2007/08 to a forecasted $3.9 billion in 2015/16. Depending on the contents of the budget, the province’s financial position could be even worse than expected. Alberta is on the brink of returning to a net debt position (where the total value of government debt exceeds financial assets) for the first time in more than 15 years.

Will the government strike at the source of its fiscal problems?

A popular narrative holds that the recent fall in oil prices is chiefly responsible for the province’s current deficit. The evidence does not support this view. The real reason Alberta faces a large deficit is rapid spending growth over the past decade. In other words, successive provincial governments have been unable to restrict growth in spending during good times—understanding that good times don’t last forever.

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. Even if it had limited spending increases more modestly, to the growth rate of the provincial economy, Alberta would still enjoy a $1.9 billion surplus rather than a deficit. Better spending management is essential to restoring the province’s fiscal health.

Despite the narrative about low oil prices being responsible for the deficit, in reality there is virtually no link between oil prices and Alberta’s fiscal balance. Alberta has balanced the budget when oil prices were much lower than today (after adjusting for inflation) and run deficits when oil prices were much higher.

Will the government pursue further damaging tax hikes?

Research shows that tax hikes generally fail to eliminate deficits while spending cuts have a much better track record and impose less economic damage. However, the Alberta government has already hiked corporate and personal income tax rates—policy moves that will reduce Alberta’s competitiveness and cause undue harm to an already struggling economy.

While increasing tax rates on upper-income earners might seem like an easy way to bring in more revenue, the government will receive much less than expected if it fails to recognize that increasing tax rates causes people to alter their behaviour. It will be important to see whether the government’s revenue projections take into account that people will find legal ways to reduce the amount of additional tax they pay. The additional revenue from the personal income tax rate hikes alone will be $1.7 billion less (or 26 per cent lower) than expected between 2016 and 2020 if behavioural responses are not accounted for. This could mean larger deficits and more debt than already planned.