Comparing the Recent Deficits of Alberta and Ontario by Steve Lafleur, Ben Eisen, and Milagros Palacios
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FRASER RESEARCH BULLETIN May 2017 Race to the Bottom: Comparing the Recent Deficits of Alberta and Ontario by Steve Lafleur, Ben Eisen, and Milagros Palacios SUMMARY QQ Alberta’s public finances are deteriorating QQ When we compare the budget deficits rela- rapidly, with the provincial government set to run tive to the size of the provincial economies, a cumulative budget deficit of $27.6 billion over Alberta’s current deficits are still larger than the three-year period from 2015/16 to 2017/18. those run by Ontario during the years following the financial crisis. QQ Until recently, by far the largest deficits of any province since the turn of the century were those QQ Alberta entered 2015/16 with no net debt at run by Ontario in the years during and following all. However, due to the size of current budget the financial crisis of 2008/09. From 2009/10 to deficits and the resulting rate of debt accumu- 2011/12, Ontario ran a cumulative budget deficit lation, Alberta’s debt levels are rapidly converg- of $3,864 per person (in 2015 dollars). ing with Ontario’s. In 2014/15, Ontario’s net debt per person was $24,256 larger than Al- QQ Alberta’s current string of budget deficits berta’s. In 2018/19, that gap is expected to have are substantially larger than Ontario’s during shrunk to $14,597 (both in 2015 dollars). In other that period. Between 2015/16 and 2017/18, Al- words, about 40 percent of the per-capita debt berta’s cumulative budget deficit will be $6,385 gap between Alberta and highly indebted On- per person ($2015 dollars). tario will have been wiped out in just five years. fraserinstitute.org FRASER RESEARCH BULLETIN 1 Comparing Recent Deficits of Alberta and Ontario Introduction ones than in the years prior to the consolida- It is widely known that Alberta is current- tion) at various points, particularly during eco- ly running large budget deficits. In fiscal year nomic downturns. In the second section of this 2015/16, the province ran a $6.4 billion oper- report, we present the largest three-year cu- ating deficit. The recently released provincial mulative deficit for each of the large Canadian budget showed that Alberta ran a deficit of provinces. This section provides context on the $10.8 billion in 2016/17 and is projected to run recent fiscal history of the Canadian provinces, another deficit of $10.3 billion in 2017/18. This showing the size of typical budget deficits dur- means that over the first three fiscal years of ing economic downturns in the years following the new government, the province will have run the fiscal consolidations of the 1990s. a cumulative budget deficit of $27.6 billion. In the next section, the paper compares the This paper provides some historical context current run of deficits in Alberta to the most for understanding the size of Alberta’s current severe run of deficits previously experienced by deficits and the severity of the resulting fiscal any large province since the fiscal consolidation challenges by comparing them with budget def- of the 1990s—Ontario in the years during and icits incurred by other Canadian provinces in after the financial crisis of 2008/09. recent years. Finally, before briefly concluding, the paper dis- Specifically, we compare the forecasted cumu- cusses how the province’s persistent deficits lative budget deficit in Alberta for the period have led to substantial debt accumulation, and ending in 2017/18 to the worst three-year cu- how accumulating provincial debt can harm the mulative budget deficits incurred by all other long-term prospects of Alberta’s economy. large Canadian provinces since 2000. The year 2000 is chosen as the starting point for this How provinces tackled their fiscal analysis because it was by that point that the challenges during the 1990s provincial governments of Canada had essential- Many Canadian provinces experienced signifi- ly completed the fiscal consolidation process of cant financial distress during the 1990s, marked the 1990s, and cumulatively, the provincial gov- by persistent deficits. The total net operating ernments had returned to a balanced budget. deficit for all provinces peaked at $25.7 billion The paper begins by a providing brief overview in the 1992/93 fiscal year (Statistics Canada, of recent Canadian fiscal history, quickly summa- 2017g). Deficits at both the provincial and federal rizing the steps taken in the 1990s by provincial levels took a substantial toll on Canada’s public fi- governments to eliminate large budget deficits. nances. By 1995, combined provincial/federal net Until recently, these fiscal consolidations have government debt in Canada hit 99.6 percent of been understood as a turning point in Canadi- GDP, totaling $825.5 billion (Canada, Department 1 an history—the point at which large, sustained of Finance, 2016; Statistics Canada, 2017e). Prov- budget deficits became a thing of the past. inces were dealing with credit downgrades and rapidly rising interest payments. The fiscal consolidations of the 1990s did not, however, altogether mark the end of budget deficits at the provincial level. Provinces have 1 Unless otherwise stated, all data are presented in continued to run deficits (although smaller real (inflation adjusted) 2015 dollars. fraserinstitute.org FRASER RESEARCH BULLETIN 2 Comparing Recent Deficits of Alberta and Ontario Figure 1: Aggregate Net Operating Balance, Provincial and Territorial Governments, 1992-2000 ($billions) 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 -30.0 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 Source: Statistics Canada, Government Finance Statistics, CANSIM Table 385-0032. This led most provincial governments (and the By 1999, the total cumulative provincial budget federal government) to undertake significant balance was positive for the first time in more reforms in order to rein in deficits, with Roy than a decade. Romanow’s Saskatchewan NDP leading the way, cutting spending by 10 percent over three fis- conventions used to report financial information cal years to eliminate the deficit (Eisen et al., to the respective legislatures. Due to differences in 2015). The Klein government also aggressively accounting and reporting practices, figures are not reduced spending in a successful effort to elim- strictly comparable between provinces. One may question our use of data from provincial inate Alberta’s persistent deficits, followed by Public Accounts (presented in the Fiscal Reference the Harris government in Ontario. Tables) and Budgets, which are not strictly compara- ble across provinces, rather than data from Statistics Figure 1 shows the cumulative effect of the pro- Canada based on the Government Finance Statistics 2 vincial deficit taming efforts beginning in 1992. (GFS), which are comparable. In spite of this short- coming, we decided to use data from the provincial Public Accounts and Budgets for two reasons. First, 2 Figures presented in this bulletin come from the provincial Public Accounts and Budgets provide more federal department of finance’s Fiscal Reference timely data. Much more importantly, Statistics Cana- Tables, unless otherwise stated. The Fiscal Refer- da’s GFS data, broken down by province, are only avail- ence Tables provide annual data on the financial able from 2007 and onwards. Data before 2007 are only position of the federal and provincial and territo- provided for Canada as a whole and not for individual rial governments. The data are presented on Public provinces. This report’s conclusions are robust, and Accounts basis, corresponding to the accounting hold regardless of the data set chosen. fraserinstitute.org FRASER RESEARCH BULLETIN 3 Comparing Recent Deficits of Alberta and Ontario Figure 2: Average Deficit per Capita Over the Three-Year Period With the Highest Cumulative Deficits Between 2000/01 and 2014/15 1,400 1,200 1,000 800 2015$ 600 400 200 0 Sources: Provincial Public Accounts; Statistics Canada, CANSIM Table 051-0001 and 326-0020; calculations by authors. Crucially, these deficit cutting efforts weren’t Provincial deficits since 2000 driven by one political party. The need to elimi- Canada’s provinces entered the 2000s with nate deficits became a cross-partisan focus, their finances in dramatically better condition with provincial NDP and PC premiers and a Lib- than when they entered the 1990s. As impor- eral prime minister presiding over significant tantly, governments across the country entered deficit cutting efforts. This approach to fiscal the new millennium with a new mindset about policy focused on the prevention or elimination budget deficits. Provincial governments general- of large deficits along with competitive taxes ly understood that budget deficits should occur and smaller, smarter government. It has been la- only during recessions or economic downturns, belled “the Chretien Consensus” and is so named should be kept to a modest size to the extent because the policies of this cross-partisan ap- possible, and should be eliminated quickly when proach were successfully implemented at the economic growth returned. In short, the Chre- federal level by the Liberal government of Jean tien Consensus that had taken shape during the Chretien and his finance minister, Paul Martin. previous decade held that the large, persistent Largely as a result of the policies of the Chre- budget deficits of the 1980s and early 1990s and tien Consensus, by the time Canada rang in the the rapid run-up in debt associated with them 3 new millennium, the fiscal consolidations of the should be things of the past. 1990s had dramatically improved the country’s fiscal outlook from coast to coast, and the coun- 3 For further discussion, see Clemens et al., End of try’s fiscal crisis had been essentially resolved.