Alberta’s fiscal challenge is large and long-standing. For years, we have undertaxed and overspent, and this has created a cause for serious concern—growing debt and concern about fiscal sustainability. While COVID has magnified this problem, there are several long-term factors that have underpinned Alberta’s revenue and expenditures, including
- revenues highly dependent upon volatile and declining resource royalties;
- a relatively low tax burden on Albertans, combined with sluggish economic growth;
- per capita spending levels that are 11% higher than the average of the other nine provinces;
- a political/social climate resistant to fiscal restraint or increased taxation; and
- an outdated mythology about being home to no provincial consumption tax.
We need to make some hard decisions about our revenues and expenses to bring Alberta back to a more sustainable position. If we don’t take reasonable action soon, we’ll need to take drastic action later.
This background paper looks at Alberta’s historical performance of, and approach to, fiscal management, including an examination of our over-reliance on resource royalties, and explores some broad options to tackle this big challenge—from aligning expenses with comparator provinces, to a discussion of new revenue options, to ways to grow our economy and therefore tax base.
Background
Historically, Alberta’s natural resources have provided significant economic growth, investment, opportunity, and revenue for the province.
When resource revenues were strong, Albertans received more from public spending on goods and services per year than they paid as taxes and user fees into the system. This created a low-tax, high-spend gap, which was financed by resources revenues.
However, resource revenues are historically volatile, as commodity prices fluctuate, which makes it difficult to accurately forecast the revenues earned from these resources.
So, when resource revenues were strong, this created pressure to spend more on goods and services, and when resource revenues dipped, the pressure to spend maintained.
As resource revenues trend downward, spending pressures hold steady and the economy remains sluggish, Alberta now maintains an artificial—and unsustainable—high-spend, low-taxation fiscal model, financed primarily through additional government borrowing.
These divergent trends—declining revenues and rising expenditures—have caused Alberta’s fiscal situation to deteriorate dramatically. And even though overall debt levels remain manageable today, they are increasing rapidly, with no clear path to budget balance or fiscal sustainability.
What is fiscal sustainability?
Fiscal sustainability refers to a government’s ability to manage its debt over the long term, while providing high quality goods and services at a given tax rate. It considers expected revenues and expenses, and it does not privilege one size of government over another, nor assume that a government will never a run deficit.