Alberta’s debt was unsustainable even before COVID-19

Analysis shows Alberta must significantly reduce spending relative to the size of the economy or raise taxes

By Tegan Hill
and Ben Eisen
The Fraser Institute

The Alberta government will release a three-year fiscal update later this month, and will be tempted to blame the province’s fiscal challenges on COVID-19. In reality, Alberta’s finances were unsustainable long before the pandemic hit.

While the COVID-19-induced recession has certainly contributed to the province’s eye-popping budget deficit – projected to be $24.2 billion in 2020-21 – and rapid debt accumulation, it represents a relatively small part of Alberta’s fiscal problems.

To understand the full extent of Alberta’s fiscal challenges, we must look beyond the COVID-19 shock and consider what’s happening over the longer-term.

Tegan Hill
Tegan Hill

First, let’s define the concept of sustainability as it’s understood by government finance economists. A government’s policies are considered sustainable if they result in a jurisdiction’s debt-to-GDP (gross domestic product) ratio staying flat or declining with time. If that ratio is on track to keep growing, finances are considered unsustainable.

If debt grows slower (in percentage terms) than the pace of the economy, it’s generally considered sustainable. If debt grows faster than the pace of the economy, finances are considered unsustainable.

A recent analysis projects Alberta’s debt-to-GDP ratio over time (based on Alberta’s fiscal position in 2018, pre-COVID-19, using reasonable assumptions and current policy). It finds that Alberta’s finances aren’t sustainable and that its government debt burden will grow over time.

The analysis shows Alberta has the largest fiscal gap of any large province. This means that (unless it wishes to raise taxes) the Alberta government must significantly reduce spending relative to the size of the economy in the years ahead.

Ben Eisen
Ben
Eisen

That same analysis finds that if Alberta wanted to reach fiscal sustainability in a single year (without tax hikes), it would need to reduce total government spending by approximately five per cent of GDP. To make this adjustment in a single year, Alberta would have to reduce program spending by approximately 30 per cent.

Of course, the government isn’t going to restore Alberta’s finances in any single year but this gives a sense of the scale of the challenge ahead.

If Alberta doesn’t make an effort to eliminate its deficit and restore provincial finances to sustainability, future generations will pay the price for today’s debt accumulation via government debt interest payments.

Growing debt charges would consume resources otherwise available for priorities, including health care, education and pro-growth tax relief. Debt interest payments already consume $2.5 billion this year and that number will grow if the province keeps piling up debt.

The COVID-19 shock has caused an increase in government debt. But in reality, it’s only a very small part of a much longer and larger-scale fiscal problem in Alberta.

Provincial finances were unsustainable before the COVID-19 recession. They will remain so until the government executes a plan to prevent the rapid accumulation of government debt over the long term.

Tegan Hill and Ben Eisen are economists at the Fraser Institute.

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