For decades, successive Alberta governments have failed to restrain spending during periods of relatively strong resource revenues. Instead, as money flows in, governments fall into the temptation to spend even more, which only leads to trouble when resource revenues inevitably decline.
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Amid news of Alberta’s new energy deal with Ottawa, the Smith government last week quietly released its fiscal update. According to the update, amid a fall in resource revenue, the government will run a projected $6.4-billion budget deficit in 2025-26 with more deficits over the next two years. Unfortunately, it’s Albertans who will foot the bill.
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Alberta’s fiscal fortunes typically follow the price of oil. For perspective, in 2015-16, oil prices fell to US$45.00 per barrel, resource revenue (e.g. oil and gas royalties) plummeted to $2.8 billion, and the Alberta government fell into a $6.4-billion deficit. In 2022-23, when oil prices jumped to US$89.69 per barrel, resource revenue skyrocketed to $25.2 billion and the government enjoyed an $11.6-billion surplus.
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Volatile revenue stream
Indeed, volatile resource revenue fuels a boom-and-bust cycle in Alberta. This fiscal year, after a windfall of resource revenue and four budget surpluses, oil prices will fall to a projected US$61.50 per barrel with projected resource revenue declining by $6.6 billion year-over-year. Correspondingly, Alberta will move from budget surpluses to budget deficits.
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Here’s the underlying problem. For decades, successive Alberta governments have failed to restrain spending during periods of relatively strong resource revenues. Instead, as money flows in, governments fall into the temptation to spend even more, which only leads to trouble when resource revenues inevitably decline. For example, when resource revenue plummeted in 2015-16, the government ran large and persistent budget deficits, Alberta lost its “debt free” status, and piled up tens of billions of dollars in debt, which continues to burden Albertans to this day.
That’s because Albertans are ultimately responsible for financing government debt. The more government debt, all else equal, the more expensive it becomes for taxpayers. For perspective, back in 2015-16, the Alberta government’s debt interest costs (per person) were $187, but today they’re nearly $600. That’s $600 for every Albertan that’s no longer available for health care and education, or even tax relief.
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So, how does the government fix its spending problem?
While the Smith government has shown important restraint in recent years, it simply isn’t enough to get spending levels where they need to be. The government must align ongoing spending with more stable ongoing revenue sources — not onetime resource revenue. Fortunately, to rein in spending, there’s some low hanging fruit. Government employee compensation, which accounts for roughly 50% of the government’s operating spending, has climbed in recent years as more government jobs have been created. And the government continues to give billions of dollars in handouts (a.k.a. corporate welfare) to select businesses and industries. Reducing the number of government jobs and ending corporate welfare would be two big steps forward.
Not too late
The recent fiscal update brings a big deficit and more red ink.
Why is this bad news? Because Albertans will be left holding the bag.
The good news? It’s not too late to change course.
Tegan Hill is director of Alberta with the Fraser Institute.
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