Yahoo Finance Jack Mintz: Alberta’s budget surprise — a genuinely prudent fiscal framework
Pre-election budgets are rarely admirable. Money is spread around like pixie dust to curry the support of voters and to knee-cap opposition parties by borrowing their ideas. To a certain extent, the pre-election good news budget that Alberta Finance Minister Travis Toews delivered Tuesday follows this time-honoured political path, helped by $27.5 billion in oil and gas revenues in the 2022/23 fiscal year.
And so it is easy to chide the budget for populist policies like freezing insurance rates and capping post-secondary tuition fee increases at two per cent and for industrial policy measures for politically favoured industries (such as agricultural processing and film and television production). And there is the usual scattering of minor tax credits instead of a general cut in personal taxes — with no mention of a tax review geared to major reform, which the United Conservative Party proposed when it took office.
Yet Alberta’s pre-election budget contains one truly remarkable surprise: a tough fiscal framework that defies campaign convention and plays to the UCP’s political base. It has four supports:
The first is legislation to mandate balanced budgets, with the usual exceptions for disasters or a sharp decline in revenues (due, for example, to a collapse in oil prices).
The second is a fiscal rule to constrain year-over-year operational spending (net of “revenue-dedicated spending”) to rise no faster than the prior year’s population growth and prices (for next year the percentage is 8.7 per cent). That is tough in its own right given that spending on health care and long-term care are set to rise due to population aging.
The third is to limit in-year expense increases to whatever has been budgeted or voted as a contingency amount — again with certain exceptions, such as the new federal funding for health care. In other words, no last-minute binges.
The fourth takes a leaf from Paul Martin’s playbook when the federal government started running surpluses beginning in fiscal year 1996-7. Martin proposed spending only half the surplus and devoting the other half to tax cuts and debt reduction. If Alberta runs a surplus, the government will use half of it for debt reduction and invest the rest in a new Alberta Fund, which will have discretion to reduce debt, deposit money into the Alberta Heritage Fund or fund one-time spending initiatives.
Finance Minister Toews can take credit for two surpluses in a row, something not seen since the Ralph Klein years
This fiscal framework is already paying off. Despite the surge in oil and gas revenues since last year, the UCP has avoided the spending binge so many previous governments indulged in. In the fiscal year just starting, operational and capital-related spending rises by only four per cent. The Alberta Heritage Fund won’t be raided to fund spending: all of its earnings will be re-invested.
As a result of these actions, Alberta is forecasting surpluses over the next three years, even with oil prices projected to decline. It is reducing its tax-supported debt by $13.4 billion in the fiscal year just ending and a further $1.4 billion in 2023-24. Subtracting out assets, Alberta’s net debt will only be 10.2 per cent of GDP, far below the 30 per cent maximum adopted in its 2020-21 budget.
This new-found fiscal discipline is a departure from the past decade and half. From 2008-9 to 2014-15, Progressive Conservative governments managed a surplus in only one year — $1.1 billion in 2014-15, despite US$100 per barrel oil prices in most years. The NDP boosted deficits tenfold to an annual average of $8 billion in the four years after oil prices collapsed in late 2014.
Inheriting a financial mess made worse by the 2020 pandemic and US$15 oil prices, the Kenney government started on a path to bring down Alberta’s per capita spending to the same level as in Ontario, Quebec and British Columbia. Having accomplished that objective and now riding an economic boom, Finance Minister Toews can take credit for two surpluses in a row, something not seen since the Ralph Klein years.
While this fiscal discipline is welcome, don’t think it won’t be challenging to hold spending growth to population and prices in years to come. Alberta’s creaky health-care system will need substantial reform and that likely will require more money even if healthcare delivery becomes more efficient. The energy transition will create new demands for infrastructure, relief for consumers from higher energy prices and subsidies for petrochemicals, hydrogen and carbon, capture and sequestration, while protectionist policies and “friend-shoring” will push up infrastructure costs.
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There is no question that fiscal rules are key to disciplining governments. With the federal budget soon to come out, Finance Minister Chrystia Freeland can take a lesson from Alberta. Ottawa’s very weak fiscal rule — don’t let the debt-to-GDP ratio rise — does not work. Once the ratio has ratcheted up, as it did during the pandemic, nothing requires the government to bring it back down. Ottawa could also use a spending rule. Federal expenditures were 14.2 per cent of GDP in 2015-16 but hit a remarkable 20.2 per cent of GDP in 2021-22, with no improvement in, and maybe even a worsening of, service delivery.
In the upcoming provincial election, Alberta’s opposition parties will likely promise more spending while the UCP will talk about fiscal prudence. The ballot question seems clear: do you support Alberta’s new fiscal framework or do you want a return to the profligate spending of earlier governments?
