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tax and spend

Alberta Premier Jason Kenney during a news conference in Edmonton on March 20, 2020.JASON FRANSON/The Canadian Press

Jason Kenney wants to be the second coming of Ralph Klein as he aims to freeze Alberta’s public spending for years to keep the deficit in check, while he and everyone else in the province wait for oil prices to rebound.

But he could end up being this century’s reincarnation of Don Getty, the last conservative premier who lost a half-fought war against a persistent deficit fuelled by evaporating energy revenues.

Assuming events play to Alberta’s favour, the province is still projecting an $8-billion deficit in 2023-24, with no plan on how to close that gap, or when. Indeed, the UCP government is declining even to say when it will provide a timeline for balancing the budget, citing pandemic-induced uncertainty.

That would be the 10th straight deficit in Alberta, an achievement even Mr. Getty’s Progressive Conservative government did not match in the late 1980s and 1990s, when a collapse in oil prices – and an unwillingness to come to grips with unpleasant political realities – resulted in a string of then-record budget shortfalls.

Mr. Getty’s successor – one Ralph Klein – was left to finally clean up the fiscal mess, with deep cuts to public spending that set the stage for a turnaround in the province’s finances once oil prices began to rise, and oil-sands investment took off.

A quarter century later, Mr. Kenney is clearly looking to model his own deficit fight on that of Mr. Klein, who focused on expenses he could control rather than revenues at the mercy of global demand. Earlier this week, he told reporters that previous administrations of different partisan hues had been criticized “for trying to project their way out of deficit. We will not be making that mistake. We will be very cautious on projecting revenues.”

That’s true, as far as it goes. The province’s forecasts for commodity prices are conservative, especially compared with the recent resurgence in oil prices.

But one expert on Alberta’s fiscal history sees some echoes of the past, with the current government’s willingness to tolerate a string of deficits resembling the fitful moves to rein in spending in the Getty years. “Between Getty and Kenney, I think they’re similar, in the sense that they’re treading water and hoping things get better,” says Livio Di Matteo, a Lakehead University economics professor, who has also produced research on Alberta’s finances for the Fraser Institute.

Alberta’s outlook for energy revenues may be on the pessimistic side, but the opposite could be true of its projections for expenditures. For a start, the (literally) flat projections for health and education spending raise questions. What was the process that resulted in projected health and K-12 education expenses being precisely the same for 2021-22, 2022-23 and 2023-24? Why not lower, other than being able to rebut accusations that the government is cutting health and education funding?

The government’s political sensitivities were on public display during Finance Minister Travis Toews’s press conference with reporters, when he rejected the notion that Thursday’s document is an austerity budget. “We’re not on a path of cost cutting. We’re on a path of delivering government services most efficiently,” he said.

In fact, the budget will be effectively reducing funding for both health care and K-12 education, given the effects of inflation and population growth. But government says it is focusing on reducing compensation, which could leave room for growth in services.

Beyond the political optics, there is the more fundamental question of the depth of the government’s commitment to restraining spending over such a long haul. Already, there is slippage on that narrow path. In its first budget, in the fall of 2019, the UCP government similarly brandished the need for spending restraint to control the deficit. In that budget, health-care spending was projected to be essentially flat over four years, rising marginally from $20.61-billion in 2019-20 to $20.67-billion in 2022-23.

But in Thursday’s budget, health-care spending projections were higher; $21.4-billion projected for both 2021-22 and 2022-23. The province pointed to a raft of standard-issue health care tweaks to account for that change: added care spaces; improvements to drug programs, home care and diagnostics; and spending to decrease waiting times.

Left unexplained is how those new outlays square with its effort to push down its per capita expenditures to be more in line with provinces such as Ontario and British Columbia.

There are also some vulnerabilities built into the province’s assumptions on interest rates. Alberta’s debt burden, as a percentage of the provincial economy, is much higher than during the Klein years. Interest rates are much lower, however, meaning that debt-servicing costs as a proportion of the overall budget are significantly smaller than was the case in the 1980s and 1990s.

But that also means that the province is much more vulnerable to any rise in interest rates. According to the budget, an increase of one percentage point in interest rates would add $205-million to the deficit, a number that will grow so long as the debt rises. With U.S. long-term rates starting to rise, Alberta is forecasting only a modest increase in long-term Canadian rates; its higher-growth scenario also foresees relatively low rates.

And, even if the government’s projections are correct, even if it succeeds in holding to a spending freeze, even if interest rates don’t unexpectedly rise, it will have a structural deficit in 2023-24.

Mr. Kenney might insist he’s breaking with the wishful-thinking tradition of Alberta budgets, but he has yet to share his battle plan on how to win his deficit fight.

Tax and Spend examines the intricacies and oddities of taxation and government spending.

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