To balance the budget, Alberta must ditch it’s big-spending ways

Next week, the Kenney government in Alberta will table its first budget. The government has signalled it’s serious about tackling the province’s budget deficit. The big question remains—exactly how will it do it?

The government has many options for reducing the deficit, but by far the best way to balance while protecting economic growth is to reform and reduce provincial spending and leave behind the province’s status as the biggest spender among Canada’s large provinces.

First, let’s look at the evidence that proves Alberta is a big spender. In 2018/19, per-person program spending (all spending other than government debt interest) was $12,622—more than $1,000 more than Quebec and approximately $2,000 more than British Columbia and Ontario. In percentage terms, this means that per-person spending in Alberta last year was 18.5 per cent higher than in next-door B.C.

So despite its national reputation for “conservatism,” in reality, Alberta is the land of free-spending. And this was true long before Rachel Notley’s government took office. In fact, at the turn of the millennium, per-person spending in B.C. and Alberta were nearly identical. Since then, however, successive governments have overseen significant spending growth, which has caused the large gap in per-person spending between the two provinces.

With this in mind, the nature of the problem starts to become clear. Alberta was once able to paper over its big-spending ways, enjoying substantial natural resource revenue that kept the deficit significantly smaller than it would have been without that revenue. In recent years, of course, things have changed. Now, Alberta’s higher spending relative to the other large provinces has produced a large annual budget deficit and growing debt burden.

In other words, all else equal, if Alberta’s spending levels were aligned with B.C., the province wouldn’t have a budget deficit today.

So what to do now? Reform and reduce provincial spending, to bring it in line with the other large provinces and thus eliminate the gap between revenue and spending in Alberta.

Some will argue that tax increases are an easier remedy for Alberta’s fiscal woes, and that the Kenney government should implement a sales tax, which exists in every other province. But this would be an unnecessarily economically-harmful strategy for deficit-reduction. Research from Harvard economist Alberto Alesina has shown that if a government tries to eliminate a deficit with tax hikes, it does far more damage to the economy than if it tackles red ink through spending reductions. Cranking up taxes would almost certainly hurt Alberta’s economy (while many Albertans are still struggling) much more than, say, reforming and reducing taxes.

In its first budget, the Kenney government will face many choices including how best to tackle the province’s daunting budget deficit. It can achieve this goal without hurting the economy if it reforms and reduces provincial spending and sheds the dubious status of being the biggest spender (by a long shot) among Canada’s large provinces.