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No ray of sunshine in Alberta's fiscal forecast
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667 words

By Ben Eisen
and Steve Lafleur
The Fraser Institute

When Rachel Notley’s NDP shook Alberta’s political landscape by winning a majority government in 2015, the similarities to the Ontario’s Bob Rae-led NDP government in the 1990s were striking.

Ben Eisen

Ben
Eisen

Both cases marked the first NDP government in provincial history, and both brought an end to Progressive Conservative dynasties (though in the case of Ontario, the beginning of the end had come a few years earlier when David Peterson formed a minority Liberal government). And both new governments faced severe recessions and significant budget deficits.

The similarities between the two premiers, in terms of managing government finances, are also remarkable.

Upon taking office, both Notley and Rae chose not to make deficit fighting a priority and cranked up spending. The Rae government increased nominal program spending (all spending except debt interest) by 16 per cent during its first two years. Similarly, the Notley government increased spending 13 per cent over two years.

Steve Lafleur

Steve
Lafleur

In its 1992-1993 budget, the Rae government finally hit the brakes on spending growth but did not meaningfully roll back its increases.

And in Alberta’s recently-introduced 2018 budget (its third), the Notley government indicated it too will slow the pace of spending growth but won’t meaningfully reduce the higher spending levels it established.

In both Ontario of the 1990s and Alberta today, this approach resulted in large persistent deficits, despite efforts to create more revenue with tax hikes. Coincidentally, deficits were about the same size in nominal dollars in both provinces. Ontario’s deficit under Rae peaked at $12.4 billion and didn’t shrink much while he was in office. The Notley government’s deficit peaked at $10.8 billion in 2016-17 and declined slightly to $8.8 billion this year, with minimal progress expected in the next two years.

Of course, some may think the two governments were bound to be alike since Notley and Rae both led NDP governments. But remember, Roy Romanow’s NDP government in Saskatchewan governed in the same era as Rae and faced even worse fiscal challenges.

But unlike Rae and Notley, Romanow responded with immediate spending reductions, which eliminated the deficit and prevented rapid debt accumulation. This approach produced big savings for taxpayers in the form of lower debt interest payments, and helped make tax relief possible later on. Romanow’s aggressive approach to deficit reduction helped lay the foundation for the prosperity Saskatchewan has enjoyed since.

Just like the other major parties, then, the NDP is capable of successful (and unsuccessful) fiscal management.

So why are these comparisons important? Why should we learn from history?

Albertans are being told by some not to worry about large deficits because the province’s overall debt burden remains small compared to other provinces.

But the Rae experience in Ontario reminds us that it can be difficult to get back on track once big deficits emerge. In fact, when Rae took office, Ontario’s net debt was $38 billion. Since then, with a brief pause in the late 1990s and early 2000s, the province has kept adding debt. Today, it’s more than $300 billion in the red.

As a result, Ontario must spend $1 billion per month on debt interest payments, making those funds unavailable for public services or tax relief.

For decades, Albertans benefited from their government not having to siphon substantial tax dollars to pay interest to creditors. But this is changing quickly.

Alberta has a long way to go to catch up with Ontario in indebtedness but it’s closing ground. Remarkably, Alberta was net-debt free as recently as 2015-16 but the province (with a population one-third the size of Ontario’s) is on track to accumulate approximately $60 billion in net debt by 2023-24.

Notley’s approach to government has been nearly identical to the Rae government in Ontario. And Alberta’s 2018 budget promises more of the same.

Given the similarities between the fiscal management of both governments, nobody should be surprised if Alberta racks up debt today that will burden taxpayers in the future, just like in Ontario.

Ben Eisen and Steve Lafleur are analysts with the Fraser Institute.

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