Alberta’s debt-to-GDP ratio set to climb—quickly

Alberta’s economy now faces its third recession in a little more than a decade. Steep economic contractions in 2009 and 2015/16 have caused tremendous economic pain in the province. Now, with cratered oil prices and COVID-19, Alberta is once again facing hard times.

Unfortunately, the province’s government finances have already been deteriorating for more than a decade. In fact, the province has gone from having no net debt at all (its financial assets actually exceeded its debts) in 2015/16 to having $35.6 billion in net debt in 2019/20.

Notwithstanding this rapid growth in debt, as of 2019/20, Alberta was still the least indebted province in Canada relative to the size of its provincial economy (the best measure of the sustainability of a province’s debt burden, usually referred to as a debt-to-GDP ratio). Alberta’s debt-to-GDP ratio was 9.9 per cent in 2019/20, with Saskatchewan being the next-least indebted province on this metric at 14.4 per cent of GDP.

With a nasty recession and historically low oil prices, Alberta is set to accumulate much more debt this year. And since the economy is contracting, the province is set to see its debt-to-GDP ratio climb quickly this year, and to blow past the current levels of two provincial governments.

Let’s start by looking at how much debt the province expects to add this year. Although the spring budget forecast an operating deficit of $6.8 billion (which itself would have been substantial), that estimate has been obliterated by events. Now, Premier Kenney says the province is likely to run a deficit closer to $20 billion.

If we make the simplifying assumption that the province will add as much capital debt as it planned in February, that would mean Alberta’s nominal debt can be expected to increase by $21.1 billion this year. This would represent a 59 per cent increase in nominal debt this year.

Meanwhile, provincial GDP is expected to drop. A recent report from RBC economics forecasted an 8.2 per cent real decline in provincial GDP. In nominal terms, that means the provincial economy will contract by almost exactly $30 billion, or 8.7 per cent.

These forecasts suggest Alberta is likely to have upwards of $56 billion in net debt at the end of the fiscal year, which would bring Alberta’s debt-to-GDP ratio to 17.7 per cent. For reference, if this comes to pass, it would be a higher ratio than in any year tracked by the RBC Fiscal Tables, which go back to 1981. Also, for comparison, it would bring Alberta’s debt-to-GDP levels higher than the 2019 levels for either Saskatchewan (14.4 per cent) or British Columbia (14.5 per cent).

Certainly, we can hope for a strong economic rebound in 2021 that will slow or stop the growth of the debt-to-GDP ratio. But it’s important to remember that it’s a sure bet Alberta will still be adding more debt then as well. Alberta’s fiscal position (net debt or assets relative to GDP) will have deteriorated in 14 consecutive years once this one is over, and it would be a mistake to assume that trend will reverse itself on its own.

Economists and analysts frequently note that Alberta is the least indebted province in Canada- and this has indeed given the province some time to address its fiscal challenges. But time is running out faster than some realize. Alberta’s debt-to-GDP ratio has, on average, increased by approximately two percentage points over the past five years. Now, with the fiscal shock, the province is on course to tack on almost eight more points this year alone.

Given this pace of debt accumulation, it’s no wonder that a report from earlier this year by the Parliamentary Budget Officer showed that Alberta’s finances are, despite current low debt levels, the least sustainable of any of the four large provinces. And of course, things have only gotten worse—much worse—since then.

None of this is to suggest that today is the right time to fix Alberta’s finances. The province has more than enough fiscal capacity to fund emergency health and economic measures. However, bringing the province’s finances back to sustainability represents one of the most important medium-term challenges facing the government in Edmonton. Once the crisis ends, the government should quickly develop a credible plan to restore health and sustainability to provincial finances.