Current fiscal plans fall short of addressing underlying issues, endangering the province’s long-term financial health
Budget 2024 is another missed opportunity to put “Alberta’s long-term fiscal house in order.” Without significant adjustments to spending and/or revenues, the result will be a string of structural deficits reaching nearly $3.7 billion by 2033/34.
This fiscal policy stance threatens the long-term goals of building the Heritage Fund to between $250 and $400 billion by 2050 and paying down the province’s taxpayer-supported debt. These are some of the major findings of an initial analysis of the long-term fiscal path resulting from the actions outlined in Budget 2024.
Using a long-term model of the provincial economy, a more prudent business-as-usual (BAU) 10-year (2024/25-2033/34) long-term fiscal outlook for the Alberta government is presented. Based on this more prudent long-term fiscal outlook, Alberta’s projected BAU surplus is a narrow $107 million in 2024/25, slipping back to a projected $1.2 billion BAU deficit in 2025/26, with projected BAU deficits then climbing to nearly $3.7 billion by 2033/34, as long-term spending growth exceeds long-term revenue growth. Cumulative BAU Alberta deficits over the next decade are projected at nearly $22 billion.
As a result, borrowing to fund these BAU deficits, as well as borrowing to fund annual cash requirements, the province’s BAU taxpayer-supported debt rises from $76.1 billion in 2023/24 to $123 billion in 2033/34, an increase of $46.9 billion or nearly 62 percent.
The long-term BAU fiscal outlook takes a more cautious approach to forecasting revenue growth than the Alberta government, using an average of U.S$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.
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. Under BAU, taxpayer-supported debt servicing costs are projected to increase from $2.3 billion in 2023/24 to $2.9 billion in 2033/34, an increase of $600 million or 26 percent.
On the expenditure side, operating spending increases in the long-term fiscal outlook are projected at the combined average of inflation and population (an average of about 3.8 percent per year), below the operating spending limits permitted under Alberta’s fiscal framework.
While operating spending increases for 2025-26 and 2026-27, in Budget 2024, are projected at 2.4 percent and two percent, respectively, since 2021-22, the Alberta government has consistently exceeded initial spending projections (net of COVID-19 spending), mainly 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 5.7 percent. And, in 2024-25, operating spending (net of COVID-19) spending) was initially projected to increase by 1.7 percent, but now is projected to increase by 3.9 percent.
Budget 2024 also shows that Alberta is no closer to getting off the “resource revenue rollercoaster.” Virtually all non-renewable resource revenue (NRR) is still being used each year to balance the budget. In fact, based on Budget 2024 assumptions, 95 percent (2024-25), 92 percent (2025-26) and 85 percent (2026-27) of non-renewable resource revenues (NRR) are needed to balance the provincial budget over the next three years. To illustrate how dependent Alberta is on NRR to fund current spending, without access to any NRR to balance the budget, Alberta’s annual non-NRR deficits would be $16.9 billion in 2024-25, $16.4 billion in 2025-26, and $15.3 billion in 2026-27
Because of this continued overspending, Alberta likely will be facing significant fiscal adjustments to get its “long-term fiscal house in order.” In fact, I estimate that without a sustained fiscal adjustment of over $3.7 billion by 2026-27, the Alberta government could slip back into a rising tide of structural deficits and debt over the next decade.
Alberta’s 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. Also, at year-end, an actual deficit could be allowed in the audited financial statements for 2024-25 if actual total revenue declines by $500 million or more from the current year’s budgeted amount.
This means that fiscal adjustments will be needed for BAU’s long-term operating spending to stay within the fiscal framework rules unless total budgeted revenues decline by $1 billion or actual revenues decline by more than $500 million from the budgeted amount. The $500 million actual total revenue decline rule is a scenario which could play out in 2024-25 as resource revenues moderate to more normal levels. It is possible that the Alberta government could declare an actual deficit at the end of 2024-25 rather than making the required long-term fiscal adjustments.
The government is now being pressured by a significant population influx, higher CPI, and an aging population, which are putting more demands on operating and capital spending. Plus, new capital spending plans have operating cost implications down the road.
Alberta has also been progressively narrowing its revenue base over the past decade and a half by eliminating health care premiums, eliminating the Climate Leadership Plan consumer carbon tax, reducing the corporate income tax rate from 12 percent to eight percent, allowing the Heritage Fund to retain all its investment income and 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 tax bracket on personal income under $60,000. Without diversifying Alberta’s revenue streams, it is difficult to see how the current long-term revenue base, incorporating an inevitable moderation in resource revenues, can keep pace with Alberta’s long-term spending pressures.
This more prudent long-term BAU fiscal outlook illustrates the long-term consequences of overspending for Alberta’s fiscal position over the next decade. Faced with future projected BAU deficits and a rising debt burden, the Alberta government must take a more strategic, long-term approach to fiscal sustainability, something lacking in its current fiscal planning systems.
“Kicking the can down the road” without making $3.7 billion in annual fiscal adjustments and instead using the spending and revenue loopholes found under the fiscal framework to run fiscal framework-induced budget deficits could see Alberta facing years of rising structural deficits and a rapidly growing debt burden. This will make the needed fiscal adjustments even more severe as 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, he served as Executive Director to 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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