Tough choices ahead for Alberta in Budget 2024

Lennie KaplanAs Budget 2024 rapidly approaches, the Alberta government is sitting on a precarious cliff when it comes to the province’s long-term finances. Because of the overspending of windfall resource revenues in the past three years, Alberta could be facing significant fiscal adjustments over the next decade.

In fact, without sustained fiscal adjustments of up to $3 billion per year, the Alberta government could easily slip back into a rising tide of structural deficits and debt.

Alberta’s new fiscal framework allows deficits in the budget when total budgeted revenues decline by $1 billion or more from the prior-year third quarter revenue forecast. This means that fiscal adjustments will be needed to business-as-usual (BAU) long-term operating spending to stay within the confines of the new fiscal framework rules unless total budgeted revenues decline by $1 billion, a not unlikely scenario as resource revenues moderate to more normal levels.

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Using a long-term model of the provincial economy, a more prudent BAU 10-year (2024/25-2033/34) long-term fiscal outlook for the Alberta government is established. Based on this more prudent long-term fiscal outlook, Alberta’s projected BAU surplus is a narrow $818 million in 2024/25, slipping back to a projected $615 million BAU deficit in 2025/26, with projected BAU deficits then climbing to nearly $1.6 billion by 2033/34. Cumulative BAU Alberta deficits over the next decade are projected at over $9 billion.

The long-term BAU fiscal outlook takes a more cautious approach to forecasting revenue growth than the Alberta government, using an average of US$70.00 WTI per barrel price in response to an accelerating energy transition and a more moderate forecast for personal income tax growth due to the impacts of an aging population. Overall, Alberta’s revenue growth averages about three percent per year under this more prudent long-term planning scenario, essentially tracking the growth in Alberta’s nominal GDP in the later years of the forecast.

Alberta has been progressively narrowing its revenue base over the past decade and a half, first with the elimination of health care premiums, then eliminating the Climate Leadership Plan consumer carbon tax, reducing corporate tax rates from 12 percent to eight percent, allowing the Heritage Fund to retain all its investment income, making personal income taxes and corporate income tax increases subject to the Taxpayer Protection Act, and now a plan to create a new eight percent bracket on personal income under $60,000. Without diversifying Alberta’s revenue streams, it is difficult to see how the current revenue base, incorporating an inevitable moderation in resource revenues, can keep pace with Alberta’s long-term spending pressures.

On the expenditure side, operating spending increases in the long-term fiscal outlook are projected at the combined average of inflation and population (or an average of about four percent per year), in line with the operating spending limits permitted under Alberta’s new fiscal framework. While operating spending increases for 2024-25 and 2025-26 are projected at 2.1 percent and 1.7 percent, respectively, in the 2023-24 mid-year fiscal update, since 2021-22, the Alberta government has consistently exceeded initial spending projections (net of COVID-19 spending), largely because of the presence of windfall resource revenues.

In 2021-22, operating spending (net of COVID-19 spending) was initially projected to increase by 1.1 percent, but actual operating spending increased by 6.2 percent. In 2022-23, operating spending (net of COVID-19 spending) was initially projected to decrease by 0.2 percent, but actual operating spending increased by 10.5 percent. In 2023-24, operating spending (net of COVID-19 spending) was initially projected to increase by 2.8 percent, but operating spending is now projected to increase by 4.8 percent.

The government is now being pressured by a significant population influx, higher CPI, and an aging population, putting more demands on the operating spending and capital spending bases; pressures exceeding the limits of the combined growth in population and the consumer price index (CPI) operating spending rule found in the new fiscal framework. Plus, new capital spending plans have operating cost implications down the road.

The long-term BAU fiscal outlook also makes upward adjustments to debt servicing costs to reflect rising short- and long-term interest rates and the impact of those rising rates on the government’s large stock of maturing debt, requiring re-financing at higher interest rates.

This more prudent long-term BAU fiscal outlook illustrates the long-term consequences of the past three years of wasteful overspending for Alberta’s fiscal position down the road. Facing future projected BAU deficits and a rising debt burden, Budget 2024 must take a more strategic, long-term approach to fiscal sustainability, something lacking in the government’s current fiscal planning systems.

This means a more carefully managed process, though permanent program review and program and service transformation, to identify and eliminate wasteful overspending, permanently cutting about $3 billion per year from the BAU spending base, starting with the 2024 budget, to make any meaningful progress on paying down debt over the next decade.

Under a $3 billion per year adjustment to spending from BAU, Alberta remains in a sustainable surplus position over the next decade, with over $10.4 billion dedicated towards taxpayer-supported debt repayment.

Without making these fiscal adjustments to BAU spending and resorting instead to spending and revenue loopholes found under the new fiscal framework to run fiscal framework-induced budget deficits, Alberta could be facing years of rising structural deficits and a rapidly growing debt burden. This will make the needed fiscal adjustments even more severe once resource revenues inevitably return to more normal levels.

Lennie Kaplan is a former senior manager in the Fiscal and Economic Policy Division of Alberta’s Ministry of Treasury Board and Finance (TB&F), where, among other duties, he examined best practices in fiscal planning. In 2019, Kaplan served as Executive Director of the MacKinnon Report on Alberta’s Finances. He recently retired from his position as Executive Director of Research at the Canadian Energy Centre.

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