Don’t blame COVID for this!

By Tegan Hill and Ben Eisen,
Economists,
The Fraser Institute,
Courtesy of Troy Media

The Alberta government will release a three-year fiscal update later this month, and will be tempted to blame the province’s fiscal challenges on COVID-19.

In reality, Alberta’s finances were unsustainable long before COVID.

While the COVID-19-induced recession has certainly contributed to the province’s eye-popping budget deficit – projected to be $24.2 billion in 2020-21 – and rapid debt accumulation, it represents a relatively small part of Alberta’s fiscal problems.

To understand the full extent of Alberta’s fiscal challenges, we must look beyond the COVID-19 shock and consider what’s happening over the longer-term.

A government’s policies are considered sustainable if they result in a jurisdiction’s debt-to-gross domestic product ratio staying flat or declining with time. If that ratio is on track to keep growing, finances are considered unsustainable. If debt grows slower [in percentage terms] than the pace of the economy, it’s generally considered sustainable. If debt grows faster than the pace of the economy, finances are considered unsustainable.

A recent analysis projects Alberta’s debt-to-GDP ratio over time [based on Alberta’s fiscal position in 2018, pre-COVID-19, using reasonable assumptions and current policy]. It finds Alberta’s finances aren’t sustainable and that its government debt burden will grow over time.

The analysis shows Alberta has the largest fiscal gap of any large province. This means the Alberta government must significantly reduce spending relative to the size of the economy in the years ahead.

That same analysis finds if Alberta wanted to reach fiscal sustainability in a single year, without tax hikes, it would need to reduce total government spending by approximately five per cent of GDP. To make this adjustment in a single year, Alberta would have to reduce program spending by approximately 30 per cent.

If Alberta doesn’t make an effort to eliminate its deficit and restore provincial finances to sustainability, future generations will pay the price for today’s debt accumulation via government debt interest payments. Debt interest payments already consume $2.5 billion this year and that number will grow if the province keeps piling up debt.

The COVID-19 shock has caused an increase in debt. But in reality, it’s only a very small part of a much longer and larger-scale fiscal problem in Alberta.

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