By: Ben Eisen and Charles Lammam, The Fraser Institute
Published in – The Roughneck Buy & Sell / May 2016
In her recent “kitchen table address” about the state of Alberta’s finances, Alberta Premier Rachel Notley confirmed her government will once again increase spending in 2016-17, despite the province’s deep deficit. It appears the plan is to try to reduce the deficit over time by slowing down the rate of spending increases while hoping for revenue growth to gradually fill the budget hole.
Notley’s plan closely resembles the fiscal strategy employed in Ontario in recent years by premiers Dalton McGuinty and Kathleen Wynne, which led to a string of budget deficits and a rapid run-up in provincial debt. If Alberta pursues the same approach, it will likely get the same undesirable results, particularly if oil prices stay low.
In some respects, Ontario’s fiscal situation in 2009-10mirrors Alberta’s today. The province was in the process of absorbing major economic shocks that had hobbled a major industry (manufacturing in Ontario’s case). Further, the province’s medium-term fiscal outlook was bleak and showed that without meaningful spending reform the province would rack up considerable new debt.
Unfortunately, Ontario’s government never delivered the kind of spending reform needed to put public finances on sound footing. Instead, it continued to increase spending, albeit at a slower pace than before and during the recession when spending rose markedly. It also raised taxes while hoping revenues would increase robustly and eventually close the budget shortfall.
This “wait and hope” approach to deficit reduction has proven unsuccessful.
In its 2009 budget, Ontario projected it would run Operating deficits for the next six years totalling $52.9 billion before finally balancing the budget in 2015-16. In fact, things have turned out much worse. Ontario’s budget is still not balanced, and the cumulative deficit from 2009-10 to 2015-16 has been approximately $81.9 billion – more than 50 percent more than projected in 2009.
In total, Ontario has seen its net debt (a measure that adjusts for financial assets) increase by $126.5 billion since 2008-09, a 75 percent increase in just seven years. As a share of the provincial economy, Ontario’s debt increased from 27.9 percent to 39.6 percent. Ontario’s government now boasts about its plan to finally balance the budget in 2017-18 – but only after significant damage has been done. And what’s more, the province plans to pile up more debt through debt-financed capital spending (at a rate of about $10 billion per year) for years to come after reaching a “balanced budget.”
Despite these negative outcomes, Notley more or less promised in her kitchen table address to bring Ontario’s model to Alberta. Despite the bleak fiscal outlook, she stated that her government would increase spending again in 2016-17, this time by about 2.8 percent, with further (smaller) increases promised in future years.
In other words, even as the government faces a $10 billion deficit this year, the premier refuses to take decisive action to reform and reduce provincial spending. Instead, the government will try to merely slow down the rate of spending growth.
So Alberta is largely pursuing the same “wait and hope” deficit reduction strategy Ontario pursued. One major problem with this approach is that even if it “works” and the deficit is eventually eliminated, it results in billions of dollars of new government debt that will be passed along and must be serviced and/or repaid by future generations of Albertans.
Another major problem, as Ontario’s example shows, is that the economy and thus government revenues may not grow as robustly as forecasted. In this case, the result will be even bigger deficits and even more debt. Failing to control spending means government finances will be even more vulnerable to future economic shocks.
Ontario provides a good example of how not to respond to an economic downturn leading to a large deficit. Unfortunately, the “kitchen table address” suggests Alberta may be poised to make the same mistakes.