Alberta government should learn from past fiscal mistakes

As budget season approaches, the Alberta government forecasts a $5.5 billion surplus this year and surpluses for the next two fiscal years.

This is welcome news for Albertans, but it’s far too soon to pop the champagne about the state of the province’s finance. The province remains heavily reliant on volatile natural resource revenues to maintain a balanced budget. And the legacy of irresponsible spending and debt accumulation in the past continues to impose costs on Albertan taxpayers in the form of rising interest payments on government debt.

Let’s examine these two related issues in turn. First, natural resource revenue this year is projected to be relatively high in historical terms at $19.7 billion (for perspective, it was recently as low as $3.1 billion in 2015/16, after adjusting for inflation). This means the province is vulnerable to a resource price shock, and if resource revenues shrink the province could quickly go back into the red. If the Smith government wants to put the province on a safer fiscal footing without raising taxes further, it must bring spending into closer alignment with more reliable and permanent sources of revenue.

Moreover, because of past spending decisions and debt accumulation, despite the current surplus, the Alberta government will spend $3.2 billion on debt interest this year, rising to $3.4 billion in 2025/26. The emergence of debt interest as a substantial line item in Alberta’s budget is an unfortunate consequence of successive governments’ poor fiscal management over the past two decades.

Back in 2004/05, when Alberta essentially reached “debt free” status, its financial assets were greater than its miniscule debt. Then-premier Ralph Klein celebrated this fiscal advantage and said “never again will this government or the people of this province have to set aside another tax dollar on debt.”

Unfortunately, Klein has proven to be wrong as a period of high government spending led to nearly uninterrupted deficits from 2008/09 to 2020/21 and subsequently, debt accumulation, which brought debt interest back into Alberta’s fiscal picture. In 2008/09, Alberta’s government debt interest costs were negligible at just $58 per person (in nominal terms). This year, that figure will reach approximately $672 per person. That’s money no longer available for other important priorities such as health care, education or tax relief.

If the Smith government continues the high-spending approach of past governments, deficits may return in the future when resource revenues fall and debt interest costs start rising—particularly if interest rates on new debt remain substantially higher than in the recent past.

Unfortunately, there’s reason to think the Smith government may not be committed to the type of spending restraint necessary to protect the province from this outcome. Instead, it’s increased nominal program spending (from 2022/23 to 2024/25) by nearly $10 billion since its original plan in the 2022 mid-year update—that’s $2,120 more per Albertan.

But there’s still time to change course. Premier Smith can rein in spending to prevent a future increase in debt interest costs and even save money so that the world-shaping power of compound interest can work for Albertans instead of against them. One recent study showed that with spending restraint Alberta could save enough resource revenue to fund a rainy-day account worth $9.8 billion by 2025/26 while keeping the books balanced. The government could use additional savings in future years to pay down existing debt or invest in savings vehicles such as the Heritage Savings Trust Fund to generate a stream of income to help pay for services and keep taxes low in the future.

Policy choices don’t just influence us today, they influence the wellbeing of future generations. Young Albertans entering the workforce today, for instance, are paying the price for the past 15 years of debt accumulation by seeing more of their tax dollars go to debt interest. In next month’s budget, the Smith government can help reverse this pattern but only if it also breaks from its predecessors’ penchant for free spending.