Report warns of slow-moving fiscal disaster for Alberta
With current trends, province’s economic policies ‘unsustainable,’ economist says
Think Alberta’s projected $8-billion deficit is big ?
Try $40 billion.
Though hard to believe, that’s the planet of red ink the province could be drowning in just a little over 20 years from now.
The alarming number is featured in a new paper by University of Calgary economist Trevor Tombe, who sees a “fiscal gap” on the horizon that will prove impassable without major structural changes to the province’s finances.
The gap is so large that it’s more accurate to call it a canyon.
And it has Alberta on the path to see its ratio of net debt to GDP rise to almost 50 per cent by 2040, Tombe projects.
Currently that ratio is eight per cent.
If debt reaches that point, interest payments could exceed $22 billion annually, which is roughly equivalent to the provincial government’s entire health budget.
The province would be forced to borrow more and more money to pay the interest on money we’ve already borrowed, which is like using your Mastercard to pay the overdue Visa bill.
Tombe’s paper is worth a read, but here’s a simple overview of why he believes Alberta is pointed at disaster.
The province’s costs are set to increase extensively in the years ahead, largely because the enormous baby boomer generation is entering a period of their lives when they will need additional health services.
At the same time, those aging baby boomers will be paying less tax since most will no longer be working.
The growth of royalties is expected to slow and remain vulnerable to volatile fluctuations — see the current price slump for Western Canadian Select oil — and it’s unlikely there will be any major sustained jumps in other established revenue sources.
Put those trends together and it’s obvious “Alberta’s fiscal policies are unsustainable,” Tombe writes.
To be clear, Tombe doesn’t think $40-billion deficits will necessarily play out, because he expects policies will change. They’ll have to.
But the work must begin now, because the challenge only gets tougher if we wait, he says.
While Tombe’s work is valuable as a scene-setter, Alberta leaders have long known about the structural chasm in the province’s finances.
They know we have relied on unsustainably high prices for a commodity that is polluting the planet and destined to become obsolete.
Calls for action have been featured in countless analyses and reports, and been ignored in favour of short-term goals.
A particular wasted effort that comes to mind was a 2011 government report called Shaping Alberta’s Future — coincidentally the same name as a political action committee now running anti-NDP ads.
The work of a blue-ribbon panel led by former federal cabinet minister David Emerson, the report began gathering dust on government shelves almost as soon as it was printed.
How do Alberta’s two leading parties plan to deal with the looming challenge?
United Conservative Party Leader Jason Kenney mentioned Tombe’s work to journalists Wednesday, noting the province could return to a balanced budget by 2021 through a combination of zero spending hikes and reasonable economic growth.
That result is certainly possible, but Kenney did not acknowledge the part of the report that discusses the years to come after, when the demographic pressures really start to balloon.
As Tombe’s analysis shows, the projected fiscal gap becomes so large that it will be nearly impossible to tackle with spending reform alone. The province will also need to increase revenue, such as through tax hikes or the introduction of a politically unpopular sales tax.
To date, Kenney’s party has been overly focused on the expenditure side of the ledger. When it comes to revenue, the UCP plans to immediately cut at least one income stream by eliminating the carbon tax — and may reduce other taxes as well — with no real explanation of how to make up that funding.
As for NDP Leader Rachel Notley, her government has taken some initial steps to diversify the economy, which will hopefully bring in new revenues. There have also been changes to income tax rates and the introduction of the carbon tax.
But those measures are nowhere near enough to address the long-term problem, not to mention the fact that government spending under the NDP has continued to rise, albeit at a slower rate in many areas.
In short, the current track of the NDP won’t work either.
No one, Tombe included, is saying this is an easy nut to crack.
Just like climate change, there is considerable doubt whether humans are hard–wired to deal with a slow moving crisis.
To begin, we must acknowledge that the problem exists. We then must recognize that the greatest threat to addressing the gap is our politics, which has become far too tribal and nearsighted.
The last words of Tombe’s paper say it best.
“To date, Alberta has kicked its fiscal can down the road,” he writes. “Politicians blame one another and remain focused on short-term electoral gains. We can do better. We must.”
A paper by University of Calgary economist Trevor Tombe says Alberta in on a path to see its ratio of net debt to GDP rise to almost 50 per cent by 2040 from eight per cent now.