Smith government may continue Alberta's spending problem

While the Alberta Sovereignty Act has garnered headlines, Albertans shouldn’t lose sight of provincial government finances. Indeed, if recent moves are any indication, the Smith government may continue to ride the resource revenue rollercoaster, which has historically produced budget deficits with big costs to Albertans.

To be clear, in the recent mid-year fiscal update, which includes the latest forecast for government finances, the Smith government projects a $12.3 billion budget surplus (2022/23). But this surplus is fuelled by volatile resource revenue, which includes natural gas and oil royalties. In the past 10 years alone, resource revenue has been as low as $2.8 billion in 2015/16 and as high as a projected $28.1 billion this fiscal year.

But governments in Edmonton, no matter their political stripe, have a bad habit of increasing spending during periods of relatively high resource revenue, which becomes unsustainable once those resource revenues inevitably decline, and the province falls into deficit.

In fact, this proclivity for high spending ultimately led to the most recent string of deficits from 2008/09 to 2020/21. And deficits—which occur when the government spends more than it collects in revenue annually—lead to debt accumulation. For perspective, Alberta moved from a net financial asset position of $35 billion in 2007/08 to a net debt position of $60 billion over that period—a fiscal deterioration of nearly $100 billion.

Of course, Albertans are ultimately responsible for financing this debt. As our debt burden grows, more and more tax dollars are directed towards paying interest costs on the government’s debt rather than programs and services for Albertans. Alberta went from spending only $61 per person on provincial debt interest costs in 2007/08 to roughly $563 in 2020/21 after the latest string of deficits. (Interestingly, despite the current surplus, Alberta’s annual debt interest costs are not projected to decline by much.)

Unfortunately, the Smith government is showing signs of potentially repeating past mistakes. For instance, the recent fiscal update reveals $2.8 billion in inflation relief measures including $600 cash payouts to seniors and children in families in “middle-income” households with annual income under $180,000. While Albertans are undoubtedly struggling with the cost of living, these “targeted” measures are a slippery slope towards big deficits in the future if any spending becomes permanent.

Even at current spending levels, provincial finances will immediately turn back to red if onetime resource revenues decline to the average seen over the last 10 years. That means the Smith government must not only restrain provincial spending but should look for ways to reform it. That could include, for instance, bringing government employee wages more in line with their private-sector counterparts.

There’s a lot going on in Alberta. But despite the current surplus, the state of provincial finances should be top of mind. Without spending reform and restraint, Albertans will continue to pay the price for debt accumulation.