Alberta’s red ink flood triggers federal alarm
News flash: Alberta’s financial policies are “not sustainable” over the long term.
That blunt assessment doesn’t come from partisan opposition critics, number-crunching economists or opinionated busybodies like myself who have warned the Notley government of a budget snowball headed toward the province.
Instead, the new critique comes from another corner: the independent Parliamentary Budget Officer in Ottawa.
Essentially, Alberta is spending way too much money on programs while collecting far too little revenue to cover the shortfall.
It has led to back-to-back $10-billion budget deficits, and the prospect of $16.9 billion in additional red ink projected for the next two years.
In a report released last week, the PBO reviewed the finances of the federal government, as well as each province (for the first time) to evaluate the sustainability of their current fiscal policies.
The idea is to ensure government debt levels don’t grow continuously as a share of the overall economy.
If the net debt-to-GDP levels expand, that creates a “fiscal gap,” according to the PBO office, which was set up to provide analysis to Parliament on the state of Canada’s finances.
The study’s assessment on federal finances is relatively benign, projecting Canada’s net debt will be eliminated in just over four decades. The report on Alberta is more like a warning siren going off. “Current fiscal policy in Alberta is not sustainable over the long term,” it states.
“PBO estimates that permanent tax increases, or spending reductions, amounting to 4.6 per cent of provincial GDP ($14.1 billion in current dollars) would be required to achieve fiscal sustainability.”
In simple language, Alberta would need to permanently increase its tax burden by 25 per cent or slash program spending by 20 per cent — or implement a combination of the two to the tune of $14 billion — to become financially sustainable.
“This is definitely a huge challenge for Alberta,” said Mostafa Askari, assistant Parliamentary Budget Officer.
“That doesn’t mean the only solution in Alberta is (to) tax more. I think it has to come from both sides. There has to be recognition that the situation is not sustainable. So something has to be done.”
And that’s key. Something must be done.
Askari notes the figures aren’t forecasts of what will happen. It’s not a crystal ball foretelling a bleak future.
Instead, it’s an examination of current fiscal policies to see what would unfold if no changes were made in the long run, after factoring in the economic consequences of Canada’s aging population.
The study includes all subnational government finances for each province, such as cities, municipalities and Aboriginal governments. The bulk of the spending in Alberta — $55 billion in this year’s budget — is driven by the government in Edmonton.
The study found Alberta has the second-largest financial gap among the provinces, behind only Newfoundland and Labrador.
Alberta is responsible for 92 per cent of the fiscal gap among all of the provincial and territorial governments combined, the report adds.
“Clearly, if there were ever a red warning light flashing on the dashboard that something is going wrong, that (figure) points to it in a severe way,” said United Conservative Party MLA Ric McIver.
Even though Alberta is projected to have the fastest-population growth in Canada and enjoy future economic expansion in the years to come, tough medicine will be required to bridge a fiscal chasm that’s as wide as the Snake River Canyon.
University of Calgary economist Trevor Tombe points out the PBO analysis doesn’t forecast future oil prices or factor in the impact increased petroleum production will have on Alberta’s future finances.
As Albertans know only too well, a return to oil prices of US$80 a barrel would have profound implications on the bottom line.
But by its very nature, resource revenue is unpredictable. This is why Alberta governments for the past decade have only made budget problems worse by banking on volatile royalties, while overspending and under-taxing.
By next year, Alberta will collect at least $8.7-billion less in taxes and carbon charges than any other province. It’s a tax advantage, to be sure, but not a sustainable one.
Tombe believes modest changes in government spending can avoid some of the negative outcomes the report is projecting, such as the debt-to-GDP ratio climbing from 27 per cent this year to 99 per cent by 2040, or public debt charges rising from $1.3 billion to $10 billion within a decade.
“What Albertans need to take out of this is some difficult choices need to be made,” he said.
“The first step to recovery is to admit we have a problem and a lot of people don’t yet fully appreciate the fiscal situation Alberta is in.”
Finance Minister Joe Ceci has promised the $10.5-billion deficit this year will be cut by a third by 2021, and that Alberta will return to a balanced budget by 2023-24.
The minister wasn’t available this week to comment on the BPO report, issuing a vague statement that Alberta’s economy is recovering and the government is committed to finding $400 million in savings this year.
Ministry officials point out the PBO report used last year’s oil price crash and Alberta’s recession as the province’s economic baseline, and suggest economic growth now underway will alter the future.
Yet, there’s no detailed plan to get the province back into a fiscally sustainable position.
The deficit snowball, however, keeps on rolling, picking up speed as it’s headed toward Alberta.