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By Steve Lafleur
and Ben Eisen
The Fraser Institute
The Alberta government’s large and persistent budget deficits remain one of the most important policy problems facing the province. This year, the province expects another deficit of more than $10 billion and forecasts call for a nearly identical deficit next year.
The government of Premier Rachel Notley is in no hurry to balance the budget. In fact, it has repeatedly said it won’t until 2023-24, nearly a decade after the oil price decline that prompted the recent recession. And even this remains an abstract promise, since the government has yet to provide a concrete plan to return to balance.
The government’s proposed long deficit reduction timeline will mean significant debt accumulation, continued reliance on volatile natural resource revenue and elevated levels of taxation.
A recent Fraser Institute study crunched the numbers to determine what level of spending discipline is required to balance the budget under Notley’s timeline.
According to the study, the government could balance the budget by 2023-24 without nominal spending reductions. (In fact, there would be room for 0.8 per cent annual program spending increases until 2023-24.)
If the government wanted to balance the budget two years earlier, it would only have to reduce annual program spending by 0.55 per cent each year until the budget is balanced.
And if it reduced annual program spending by 1.85 per cent until 2020-21, it could balance the budget three years earlier than planned.
Finally, the government could balance the budget in 2019-20 by reducing program spending by 4.7 per cent in each of the next two fiscal years.
So which timeline should the government choose?
There are several advantages to balancing the budget sooner rather than later.
First, a slow approach to deficit reduction will mean substantial debt accumulation. If the government balances the budget by 2023-24, it will accumulate a projected $62 billion in net debt by the time the budget is balanced. Balancing the budget two years earlier would reduce that total by more than $10 billion.
Of course, the more debt the government racks up now, the higher the debt interest payments (paid for by taxpayers), which means fewer dollars for public programs or tax relief.
Second, a slow crawl to balance will mean another long ride on the resource roller-coaster. Running deficits means no room for contributions to Alberta’s Heritage Savings Trust Fund. As a result, the government will continue using resource revenue for current spending rather than saving a portion for future generations, as the fund was intended to do.
And remember, there’s no guarantee that current revenue projections will hold – especially if we experience another economic shock over the next few years.
Third, it will be difficult to restore Alberta’s erstwhile tax advantage until at least 2023-24, unless the government considers deficit-financed tax reductions that would push the balanced budget date further into the future.
Given that the current government increased the top personal income tax rate by 50 per cent and the corporate income tax by 20 per cent, that’s problematic – especially in light of aggressive tax cuts in the United States, which have helped erode Alberta’s tax competitiveness relative to energy-producing states such as Texas and North Dakota.
Hopefully given the relatively mild spending restraint required to balance the budget on an expedited timeline, and the obvious consequences of waiting, the government will take the steps necessary to make it happen.
With budget season quickly approaching, we will soon find out.
Steve Lafleur and Ben Eisen are analysts at the Fraser Institute.
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