Alberta’s resource-fuelled budget surplus masks long-standing spending problem

With the recent windfall in resource revenue, the sentiment towards fiscal policy in Alberta has shifted. Indeed, as budget deficits turned to surpluses, policy discussions moved from how to restrain government spending to how best to use the additional revenue. While the fiscal turnaround is good news, if the provincial government maintains this latest era of high spending, it will only lead to more deficits when resource revenues inevitably decline in the future.

First, a bit of history.

There have been two main periods of prolonged increases in per-person spending in Alberta since 1965. The first ran from the mid-1960s to the early-1980s. Overall, per-person spending, which excludes debt interest costs and is adjusted for inflation, increased from $3,216 in 1965 to $12,305 in 1982. Over much of the period—particularly in the 1970s—spending growth corresponded with relatively high oil prices and increased resource revenue for the provincial government.

As resource revenue fell, years of increased spending culminated in persistent deficits and an immense accumulation of debt by the early-1990s. To get Alberta’s fiscal house in order and avoid a potential crisis, the Getty and Klein governments had to rein in spending. After sharp spending cuts under the Klein government reduced per-person spending by 22.2 per cent over four years, per-person spending was reduced to $7,154 in 1996.

Once the province balanced its budget in 1994/95 and began successfully paying down debt, however, per-person spending began another ascent (particularly as resource revenue began to increase in the early-2000s—not unlike the first period of prolonged spending growth).

By 2003, the Klein government’s spending ramped up considerably as the province became debt free and no longer had a clear fiscal anchor guiding its spending decisions. As a result, per-person spending at the end of Klein’s tenure was 18.8 per cent higher than when he took office.

By 2008, per-person spending grew to $13,114, and despite a small 1.8 per cent decline in 2009, remained at near record-high levels, marking a new era of permanently high spending that superseded the previous period. Finally, in 2017 under premier Rachel Notley, per-person spending reached its highest level ($13,719) since 1965 while Jason Kenney recorded the second-highest level ($13,640) during COVID-19 in 2020, the latest year of available data (that year, non-COVID related per-person spending totalled $12,347).

This time, a windfall in resource revenue will save Alberta from deficits in 2021 and 2022 without Klein-sized spending reductions, though the provincial government has shown some spending restraint in recent years. But if the era of higher spending continues—or even worse, per-person spending begins to climb—we’ll again incur deficits once resource revenue inevitably falls.

Indeed, in Budget 2022 the Kenney government forecast a surplus of $511 million for fiscal year 2022/23. But if resource revenue returns to its average level over the past 10 years, the surplus would immediately flip to a deficit of $6.8 billion.

The recent windfall in resource revenue should not mask Alberta’s underlying spending problem. To avoid more deficits in the future, and the subsequent mounting debt and interest costs, the provincial government must end Alberta’s latest era of high spending.