Alberta's 2016 budget: Ignoring lessons from Alberta’s history

Alberta’s 2016 budget confirmed provincial public finances are in bad shape. This year, the government expects to run an operating deficit of $10.4 billion (representing 3.3 per cent of provincial GDP). Alberta will also become a debtor province this year (its debts will exceed its financial assets) for the first time since 1999/00 and expects to rack up $37 billion in new debt over the next three years.

Alberta has proven itself capable of addressing serious fiscal challenges in the past. The province’s own history provides a blueprint for how it can get its fiscal house in order. Unfortunately, the Notley government has rejected this blueprint and is pursuing an approach to fiscal policy that has been tried and failed in Alberta before.

It is easy to forget the past fiscal challenges Albertans have endured. Throughout most of the 1980s and early 1990s, Alberta repeatedly ran operating deficits. The government of the day continued with annual spending increases while hoping for natural resource revenue growth to fill the budget hole.

The “wait and hope” approach failed as deficits persisted and the province’s financial assets dwindled from approximately $12 billion in 1985/86 to zero in 1990/91. In subsequent years, the province would rack up substantial debt.

In 1993, following the election of Premier Ralph Klein, the government finally set in motion a bold plan to balance the budget. The province embarked upon an ambitious reform program which led to a 22 per cent reduction in program spending over three years.

While these were difficult times for many Albertans, the tough choices were necessary and produced a remarkable fiscal turnaround, with the province’s $3.4 billion deficit (4.3 per cent of GDP) being erased in just two years. This began a string of surpluses which allowed the province to quickly eliminate its net debt.

Incidentally, these reforms occurred during a period where oil prices hovered around $30 per barrel (in 2015 dollars).

Did these spending reductions cause the economy to contract as some suggest spending restraint today would do? Hardly. In fact, between 1993 and 1997, Alberta’s economy grew significantly faster than the rest of the country.

What’s more, the Klein government's spending reforms laid the foundation for tax reforms that ultimately contributed to an extended period of prosperity. Indeed, these reforms ensured that when resource prices did go up, Alberta was well positioned to boom.

Some, due to political preferences, may be reluctant to look to a Progressive Conservative government for an example of successful fiscal policy. But no political party has a monopoly on smart spending reform. For example in the 1990s Roy Romanow’s NDP government reduced program spending by 11 per cent over three years, quickly eliminating a large deficit.

Unfortunately, Alberta’s recent budget rejects the model for fiscal consolidation that worked in Alberta and Saskatchewan during the 1990s and largely embraces the unsuccessful passive approach of the 1980s.

Despite facing a $10.4 billion operating deficit this year, the Notley government has chosen to accelerate the annual growth in government spending in the years ahead.

Furthermore, the budget lays out no timeline stating when the province will return to a balanced budget. Again, this risks returning to the approach to fiscal policy that prevailed during the 1980s when deficits were “business as usual.” Routine deficits mean more debt, and they make provincial finances vulnerable to additional future economic shocks. If the economy suffers a downturn when the government is already in deficit, the result is even more debt and less fiscal flexibility. This scenario has played out before in Canadian history.

The decision in the budget to push ahead with further spending increases and avoid a timeline for returning to budget balance represents a failure to learn the lessons of Alberta’s past. Indeed, the government’s plan closely resembles the failed passive approach to deficit reduction from the 1980s. The results aren’t likely to be much better this time around.