Notley should mimic Romanow, not Rae

Alberta is piling on debt like Ontario, Ben Eisen and Steve Lafleur write.

When Rachel Notley’s NDP shook Alberta’s political landscape by winning a majority government in 2015, the similarities to Ontario’s Bob Rae NDP government in the 1990s were striking.

Both cases marked the first NDP government in provincial history, and both brought an end to Progressive Conservative dynasties (though in the case of Ontario, the beginning of the end had come a few years earlier when David Peterson formed a minority Liberal government). And both new governments faced severe recessions and significant budget deficits.

The similarities between the two premiers, in terms of managing government finances, are also remarkable.

Upon taking office, both Notley and Rae chose not to make deficit fighting a priority and cranked up spending. The Rae government increased nominal program spending — which is all spending except debt interest — by 16 per cent during its first two years. Similarly, the Notley government increased spending 13 per cent over two years. In its 1992/1993 budget, the Rae government finally hit the brakes on spending growth, but did not meaningfully roll back its increases.

Last week, in Alberta’s 2018 budget (Notley’s third) the Notley government indicated it too will slow the pace of spending growth, but will not meaningfully reduce the higher spending levels it established.

In both Ontario of the 1990s and Alberta today, this approach resulted in large persistent deficits, despite efforts to gin-up more revenue with tax hikes. Coincidentally, deficits were about the same size in nominal dollars in both provinces.

Ontario’s deficit under Rae peaked at $12.4 billion and didn’t shrink much while Rae was in office. The Notley government’s deficit peaked at $10.8 billion in 2016/17 and declined slightly to $8.8 billion this year, with minimal progress expected in the next two years.

Of course, some may think the two governments were bound to be alike since Notley and Rae both led NDP governments. But remember, Roy Romanow’s NDP government in Saskatchewan governed in the same era as Rae, and faced even worse fiscal challenges.

But unlike Rae and Notley, Romanow responded with immediate spending reductions, which eliminated the deficit and prevented rapid debt accumulation. This approach produced big savings for taxpayers in the form of lower debt interest payments, and helped make tax relief possible later on.

In short, Romanow’s aggressive approach to deficit reduction helped lay the foundation for the prosperity Saskatchewan has enjoyed since.

Today, Albertans are being told by some people not to worry about large deficits because the province’s overall debt burden remains small compared to other provinces.

But the Rae experience in Ontario reminds us it can be difficult to get back on track once big deficits emerge. In fact, when Rae took office, Ontario’s net debt was $38 billion. Since then, with a brief pause in the late 1990s and early 2000s, the province has kept adding debt, and is today more than $300 billion in the red.

As a result, Ontario’s government must spend a billion dollars a month on debt interest payments, funds that are unavailable for public services or tax relief. For decades, Albertans benefited from their government not having to siphon substantial sums of tax dollars to pay interest to creditors, but this is changing quickly.

Alberta has a long way to go to catch up with Ontario in indebtedness, but it is closing ground. Remarkably, Alberta was net debt free as recently as 2015/16, but the province (with a population one-third the size of Ontario’s) is on track to accumulate approximately $60 billion in net debt by 2023/24.

Notley’s approach to government has been nearly identical to the Rae government in Ontario. And Alberta’s 2018 budget promises more of the same. Given the similarities between the fiscal management of both governments, nobody should be surprised if Alberta racks up debt today that will burden taxpayers in the future, just like in Ontario.

Ben Eisen and Steve Lafleur are analysts with the Fraser Institute.