Kenney government can learn deficit-reduction dos and don’ts from Canadian history

As the new UCP government prepares its first budget, it should heed the lessons of Canadian history and move to eliminate the province’s budget deficit quickly rather than take the “slow and steady” approach that has so often been found wanting across the country.

A few numbers illustrate the severity of Alberta’s deficit problem. Alberta’s budget deficit for the 2019/20 fiscal year is currently forecasted to be $7.9 billion. That means the government is spending more than $1,800 more than it takes in for every Albertan this year alone. And big deficits are nothing new—the province has run nearly uninterrupted deficits since 2008.

As a result of all these deficits, current forecasts show that Alberta will surpass $50 billion in net debt by 2021/22. For context, Alberta had no net debt at all (meaning its financial assets exceeded its liabilities) as recently as 2015/16. This is a remarkable pace of debt accumulation which, per-capita and relative to GDP, greatly exceeds what’s taking place in any other Canadian province except Newfoundland.

To understand the right solution to those problems, it’s first important to identify the cause—rapid spending growth by successive governments dating back to the early 2000s. Since then, provincial spending has markedly outpaced what would have been needed to offset cost pressures from inflation and population growth. If spending had been kept in line with inflation plus population, the rapid run-up in debt simply would not have happened.

So since spending is the source of Alberta’s fiscal challenges, the new government must strike at its root by reforming and reducing spending to solve it.

If the Kenney government is willing to take this approach, Canadian history suggests the deficit can be eliminated quickly. Indeed, during the 1990s, governments across Canada faced severe fiscal challenges. Whether it was the NDP government of Roy Romanow in Saskatchewan, the federal Liberal government of Jean Chretien in Ottawa, or the Progressive Conservative government of Ralph Klein in Alberta, these governments reduced spending significantly to slay their deficits in three years or less. This stopped the rapid accumulation of debt and set the stage for tax relief that helped contribute to future prosperity.

Since then, a different “slow and steady” approach to deficit-reduction has come into style in Ottawa and many provincial capitals. Under this approach, governments have tried to shrink their deficits gradually over time by continuing to increase spending—but at lower rates than forecasted revenue growth to close the gap between the two over time. This strategy generally has not proved successful.

The slow-and-steady approach to deficit reduction was perhaps best exemplified by the two governments of McGuinty and Wynne in Ontario following the 2008/09 recession. Once the recession ended, those governments laid out a lengthy plan to balance the budget by 2017/18.

So what happened? The deficit did creep down over time, but never was eliminated. And meanwhile, Ontario’s debt soared to more than $24,000 per person. If Alberta pursues a similar strategy now, it’s likely to experience similar outcomes.

In crafting its deficit-reduction plan, Premier Kenney’s government will face the options of going slow or moving quickly. The latter course has several advantages, including reducing the amount of debt that we place on the shoulders of future generations of Albertans.