Rising debt-interest payments further threaten Alberta government’s deteriorating fiscal situation

Last week in this space, we outlined the Alberta government’s deteriorating finances, as spelled out in the Kenney government’s recent fiscal update, which projects that the province will rack up $50.0 billion in new debt over the next three fiscal years. This week, we’ll look more closely as one the consequences of all that debt—government debt interest payments (i.e. debt-servicing costs) are an immediate consequence of debt accumulation.

Until recently Alberta had trivially low debt-servicing costs, but Alberta’s advantage on this front is quickly coming to an end, meaning Albertans will see more of their hard-earned tax dollars paying interest on government debt rather than on services they expect government to provide.

For nearly two decades, Alberta was the only province in a net financial asset position—in other words, it held more financial assets than debt (beginning in 1999/00). As a result of having no net debt (total debt minus financial assets) Albertans spent very little on debt interest. This fiscal advantage made it easier to maintain low tax rates.

For example, in 2007/08, Alberta spent just $61 per person on provincial debt-service costs—far less than the other provinces, which had to spend between $521 and $1,476 per person servicing their debt. This fiscal advantage saved Alberta taxpayers a lot of money over the years.

To illustrate this point, consider this. If Alberta’s per-person debt-servicing costs in 2007/08 had been similar to Saskatchewan’s, Alberta would have paid roughly $2.7 billion more in debt-service payments that year—that’s only slightly less than it spent on social services. If Alberta’s per-person debt-servicing costs in 2007/08 were similar to Quebec’s, Alberta would have had to pay roughly $3.8 billion more than it did that fiscal year.

Unfortunately, Alberta’s recent string of budget deficits (since 2008/09) has eroded this fiscal advantage. Alberta lost its “debt-free” status in 2016/17 when its debt surpassed the value of its financial assets. Among all provinces, from 2007/08 to 2019/20, Alberta experienced the greatest increase in nominal per-person net government debt (federal and provincial). Alberta’s net debt is now projected to reach 90.1 billion by 2022/23.

As governments add debt, all else equal, the cost of servicing debt increases. Accordingly, Alberta’s debt interest payments have increased quickly. In total, debt interest will cost Albertans a projected $3.0 billion by 2022/23. On a per-person basis, that means debt-service costs will increase from $61 per person (2007/08) to a projected $660 per person by 2022/23. And again, the more money diverted to servicing debt, the less leftover for important priorities including health care, education and pro-growth tax relief.

Unless the Kenney government charts a path to budget balance, that number will likely increase. Alberta’s debt-servicing costs could potentially overtake costs in other provinces.

As Alberta continues to rapidly accumulate debt, it risks eroding a distinct fiscal advantage—relatively low debt-interest payments—and that’s bad news for Albertans.