FRASER RESEARCH BULLETIN May 2018 The Decline of the Other Alberta Advantage: Debt Service Costs in Alberta Are Rising by Steve Lafleur, Ben Eisen, and Milagros Palacios
* = per-person
Summary
Throughout recent history, Albertans have In the most recent fiscal years, however, enjoyed a substantial fiscal advantage other Ca- Alberta’s net asset position has flipped from nadian taxpayers, resulting from the fact that positive to negative and the province is quickly government debt interest payments in Alberta racking up debt. have been far lower than in any other province. As a result of rapid debt accumulation, the For example, in 2007/08, Alberta’s provin- cost of servicing Alberta’s debt is quickly catch- cial government spent just $61 per person on ing up with other provinces. Current projec- debt interest payments. The other nine prov- tions suggest that by 2020/21, Alberta’s debt inces had to spend between $521 and $1,476 per service payments per person will exceed British person servicing debt. Columbia’s and will be approximately 70 per- cent as large as Ontario’s. This fiscal advantage has saved Alberta’s taxpayers billions of dollars each year in the If Alberta’s pace of debt accumulation con- recent past. tinues at a similar rate in subsequent years, Alberta will join Newfoundland & Labrador and Alberta’s debt interest payments were so Quebec (and possibly Ontario) as the only prov- low because the province carried very little inces paying more than $1,000 per year in per- debt. Until 2016/17, Alberta was “net debt free,” capita debt interest payments. meaning that its financial assets were greater than its liabilities. fraserinstitute.org FRASER RESEARCH BULLETIN 1 Rising Debt Service Costs in Alberta
Introduction equal), the annual cost of servicing that govern- ment debt increases, at least in nominal terms. Throughout recent history, Alberta enjoyed at least two distinct fiscal advantages over all oth- Debt servicing costs generally grow both as the 1 er Canadian provinces. The first of these was principle owed increases and as interest rates Alberta’s famous “tax advantage.” In 2015, this rise. This situation is important for taxpay- advantage was badly eroded by tax increases ers because rising debt service costs consume enacted that year (Eisen, Lafleur, and Palacios, scarce resources that would otherwise be avail- 2017). Alberta’s second important fiscal ad- able for other priorities. To put the numbers vantage over all other provinces has been its in context, the average Canadian paid $1,752 to uniquely low annual government debt interest service federal, provincial, and local govern- payments. That advantage, too, is now being ment debt in 2017 (Lammam et al., 2017). That quickly eroded by the province’s rapid accumu- money could have been used to finance impor- lation of public debt. tant programs or provide tax relief. Govern- ments with higher debt servicing costs must The debt interest advantage Alberta used to employ some combination of higher taxes and have was firmly rooted in its status as Canada’s fewer services to cover those higher costs. only province with positive net financial assets (i.e., Alberta’s government’s financial assets ex- As we will see below, the amount that provin- ceeded its debts). But the province lost that cial governments pay for debt servicing var- status in 2016/17. With that loss, and with rap- ies greatly; historically, Alberta has been in the id debt accumulation since then together with enviable position of paying a small fraction of much more debt accumulation expected in the what governments in other provinces pay. years to come, it is forecast that this debt inter- est advantage will continue to erode substan- The other “Alberta Advantage”: Minimal tially in the years ahead. This bulletin examines debt servicing costs how annual government debt service payments All provincial governments in Canada pay some in Alberta (relative to the provincial population) debt service costs. Until recently, Alberta stood is rapidly converging with most other provinces, out from the Canadian pack for its extremely essentially eliminating a fiscal advantage that Al- low annual debt servicing costs. Figure 1 dem- berta’s taxpayers have enjoyed for decades. onstrates this by comparing per-person debt servicing costs among the provinces (in nomi- What are debt service payments and nal dollars) for 2007/08. We choose 2007/08 as why do they matter? an illustrative year because it is the year before Alberta’s overall asset position began to decline While most of the focus around government borrowing is on the size of the deficit and amount of accumulated debt, comparably lit- tle discussion focuses on the cost of servicing 1 There are hypothetical cases, depending on inter- debt. When governments add debt in a given est rate fluctuations, where a government could year (by borrowing—either to make up for defi- accumulate debt but the cost of debt servicing could cits or to finance capital spending, all else being remain the same or shrink.
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Figure 1: Debt Servicing Charges per Capita ($ nominal), 2007/08
1,600
1, 00
1,200
1,000
800
600
00
200
0 NL C NS PEI S NB MB N BC AB
Sources: Canada, Department of Finance (2017); Provincial public accounts 2016/17; Statistics Canada, CANSIM Table 051-0001; calculations by authors.
and because that year is highly representative Over time, this “fiscal advantage” has saved tax- of the years surrounding it. payers a substantial amount of money. Consider that if Alberta’s debt service costs in 2007/08 Figure 1 shows that in 2007/08, Alberta spent had been similar to Saskatchewan’s ($758 more just $61 per person on debt service costs. This per capita), Alberta would have had to pay is far less than any in other province, where roughly $2.7 billion more in debt service pay- per-capita debt service costs ranged from 8.6 ments that year—and those funds would then to 24.2 times higher than in Alberta. have been unavailable for other purposes. For As noted, the statistics for 2007/08 are illustra- context, $2.7 billion is only slightly less than the tive of the low debt interest costs that had pre- $3.1 billion the provincial government spent on vailed in Alberta for a long time. Per-capita debt social services that year. If Alberta’s per-per- service costs for Alberta ranged from $85 to $186 son debt service costs were similar to Quebec’s every year between 2003/04 and 2015/16 (the that same fiscal year ($1,077 more), the cost to last year the province enjoyed a net asset posi- taxpayers would have been roughly $3.8 billion tion). In each of these years, all other provinces dollars higher than was the case – equivalent to paid several times more than Alberta to credi- more than 40 percent of the provincial educa- tors in per-person debt service costs. tion budget in 2007/08. Clearly, Alberta’s status as the jurisdiction with by far the lowest debt service costs has produced a substantial fiscal advantage.
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Figure 2: Per Capita Net Debt ($ nominal), 2007/08
25,000
20,000
15,000
10,000
5,000
0
- 5,000
- 10,000
- 15,000 NL C NS N PEI NB MB S BC AB
Sources: Canada, Department of Finance (2017); Provincial public accounts 2016/17; Statistics Canada, CANSIM Table 051-0001; calculations by authors.
Rising government debt is eroding Figure 2, which compares per-capita net debt Alberta’s other fiscal advantage in every province for the 2007/08 fiscal year, highlights how unusual Alberta’s position was. We have seen that Alberta’s low annual debt service payments have given it a substantial ad- Figure 2 shows that the government of Alberta vantage over other jurisdictions in recent histo- had accumulated nearly $10,000 in financial as- ry. But why? This fiscal advantage is a function sets for every Albertan. By contrast, every other of the fact that Alberta has (and still does) carry province carried net debt, ranging from ap- less public debt than any other province. But proximately $5,000 per person in British Co- Alberta’s fiscal situation is deteriorating rapidly. lumbia and Saskatchewan, to approximately $12,000 in Ontario, to $20,000 in Newfound- Despite the fact that rapid spending growth land & Labrador. had already begun to sow the seeds of Alber- ta’s current fiscal challenges, 2007/08 repre- In 2008/09, however, Alberta began a string of sented the peak of Alberta’s net asset position. budget deficits that has gone nearly uninter- In 2007/08, not only was Alberta alone among rupted since. Those budget deficits, along with the provinces in having no net debt, but it had a significant debt-financed capital spending, have $35 billion net financial asset position, meaning caused a rapid erosion in the province’s fiscal that it owned $35 billion more in financial as- position. Figure 3 shows the deterioration in sets than it held in debt. Alberta’s financial assets since 2007/08.
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Figure 3: Alberta’s Net Financial Assets (+)/Debt (–) ($ millions), 2007/08 to 2023/24
0,000
20,000
0
- 20,000
- 0,000
- 60,000
- 80,000
Note: Data are not fully comparable due mainly to various changes to accounting standards. Major breaks in the series include 2008-09 to 2016-17: SUCH sector included on “line-by-line” basis (revenue, expense, assets and liabilities reported in revenue, expense, assets and liabilities).
Sources: Canada, Department of Finance, 2017; Alberta Finance, 2017; Alberta, Finance, 2018.
Within a nine year period, the government The cost of servicing Alberta’s debt drew down all of its net assets and in 2016/17 The elimination of Alberta’s net assets de- returned to a net debt position. The govern- scribed above, and especially the rapid increase ment forecasts that debt will already have in debt that is now occurring and is expected climbed to over $30 billion by the end of this to continue to occur in the years ahead, are fiscal year (2018/19). Despite the fact that the quickly causing Alberta’s “other” fiscal advan- recent recession is over, the government plans tage—minimal debt service payments—to disap- for net debt to continue climbing quickly, pear. Already in 2018/19, Alberta’s government reaching $56 billion in 2023/24. Combined with expects its per-person debt service payments the deterioration already experienced, that to reach $442. This is only about $120 less than would be a decrease of roughly $91 billion dol- the per-person debt service costs in BC and lars in the province’s net assets in 15 years. This Saskatchewan. By contrast, in 2007/08, the gap has led to, and will continue to lead to, a sub- was more than four times as large. Alberta’s stantial increase the province’s debt servicing per-capita debt service payments are still the costs. lowest in Canada, but the size of the advantage has diminished substantially.
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Figure 4: Alberta’s per-Capita Debt Servicing Costs ($ nominal), 2007/08 to 2020/21
2,000 NL 1,750 PEI 1,500 NS
1,250 NB QC 1,000 ON 750 MB 500 SK
250 AB BC 0
Note: Data are not fully comparable due mainly to various changes to accounting standards. Major breaks in the series include 2008-09 to 2016-17: SUCH sector included on “line-by-line” basis (revenue, expense, assets and liabilities reported in revenue, expense, assets and liabilities).
Sources: Canada, Department of Finance, 2017; Provincial public accounts 2016/17; Provincial budgets 2018; Statistics Canada, CANSIM Table 051-0001 and 052-0005; calculations by authors.
The forecast is that Alberta’s debt service pay- ning of the period, Alberta (black line) clearly ments fiscal advantage will continue to be stands alone with the lowest interest payments eroded in the years ahead—and, in fact, will dis- per person. By the end of the projection, in appear entirely relative to at least two provinc- 2020/21, Alberta (at $655 per person) is ex- es. Figure 4 shows the evolution in debt service pected to exceed debt service levels in British payments per province since 2007/08 (ending Columbia and Saskatchewan in their last year in the last year for which each provincial gov- reported, and will likely be closing in on several ernment provides projections).2 At the begin- other provinces where per-capita debt service charges are essentially stable.
2 Because forecasts for Saskatchewan, Manitoba, Remarkably, by 2020/21, Alberta’s per-capita New Brunswick, and Newfoundland & Labrador are interest payments on government debt are ex- not currently available up to 2020/21, we have pro- pected to be approximately 70 percent as large vided data up until the last year for which estimates are available. While that means the comparisons are not ideal, their inclusion nevertheless highlights rapidly to most provinces other than Newfoundland that Alberta’s debt servicing costs are catching up & Labrador.
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as those for highly indebted Ontario. That year, Conclusion debt service payments per person in Alber- Although Alberta’s formerly unambiguous tax ta are expected to be 59 percent as high as in advantage compared to other states and prov- Quebec—a province that is in the early stages of inces was eroded in recent years, its minimal a long process of repairing its finances after de- debt service costs flowing from the province’s cades of fiscal mismanagement. “net debt free” status still provided the province Figure 4 shows that just three fiscal years from with a second distinct fiscal advantage. With now, Alberta’s per-person debt servicing costs less money diverted to debt service payments, are set to surpass at least two provinces and be more was available for other priorities. Howev- within striking range of several others. In short, er, the yearly per-capita debt service payments Alberta’s status as a province with uniquely low gap between Alberta and most other provinces debt service costs will be long gone. is shrinking quickly, which will make it harder for future governments to achieve balanced In subsequent years, the forecast is for the situ- budgets and provide Albertans with public ser- ation to worsen further. Given that Alberta’s vices and tax relief. government still intends to run a $7 billion defi- cit in 2020/21, these costs will continue to in- crease at least until the budget is balanced in References 2023/24, and perhaps longer depending on in- Alberta Finance (2018). Fiscal Plan: Bud- terest rates and borrowing for capital spending. get 2018. A Recovery Built to Last. Govern- ment of Alberta.
British Columbia, Ministry of Finance (2017). Public Accounts 2016/17. Government of Brit- 3 After a brief slowdown, Ontario’s net debt per per- ish Columbia. son has once again began to increase more quickly and as a result it, too, may soon join the group of Canada, Department of Finance (2017). Fiscal provinces paying more than $1, 000 per resident per Reference Tables (September 2017). Govern- year in debt payments. ment of Canada. fraserinstitute.org FRASER RESEARCH BULLETIN 7 Rising Debt Service Costs in Alberta trf/2017/frt-trf-17-eng.asp>, as of January 25, Ontario, Ministry of Finance (2017). Public Ac- 2018. counts of Ontario 2016/17. Government of On- tario. Eisen, Ben, Steve Lafleur, and Milagros Palacios (2017). The End of the Alberta Tax Advantage. Prince Edward Island, Department of Finance Fraser Institute. Manitoba, Ministry of Finance (2018). Budget Québec, Ministère des Finances (2017). Public 2018. Government of Manitoba. Accounts 2016/17. Government of Québec. Manitoba, Ministry of Finance (2017). Public Ac- Saskatchewan, Ministry of Finance (2018). Sas- counts of Manitoba 2016/17. Government of katchewan Provincial Budget 18-19. Govern- Manitoba. ment of Saskatchewan. New Brunswick, Department of Finance (2018). Saskatchewan, Ministry of Finance (2017). Public Budget 2018-2019. Government of New Bruns- Accounts 2016/17. Government of Saskatchewan. wick. Statistics Canada (2017a). CANSIM Table 051- New Brunswick, Department of Finance (2017). 0001: Estimates of Population, by Age Group Public Accounts 2016/17. Government of New and Sex for July 1, Canada, Provinces and Ter- Brunswick. ritories, annual (persons). Government of Canada. Nova Scotia, Department of Finance (2017). Pub- lic Accounts of the Province of Nova Scotia 2016/17. Government of Nova Scotia. Ontario, Ministry of Finance (2018). A Plan for Care and Opportunity – Budget 2018. Govern- ment of Ontario. fraserinstitute.org FRASER RESEARCH BULLETIN 8 Rising Debt Service Costs in Alberta Steve Lafleur is Senior Policy Ana- Copyright © 2018 by the Fraser Institute. All rights re- lyst at the Fraser Institute. He holds served. Without written permission, only brief passag- an MA in Political Science from es may be quoted in critical articles and reviews. Wilfrid Laurier University and a BA from Laurentian University where ISSN 2291-8620 he studied Political Science and Media queries: For media enquiries, please contact Economics. His past work has fo- our communications department via e-mail: commu- cused primarily on housing, trans- [email protected]; telephone: 604.714.4582. portation, local government, and inter-governmental fiscal relations. Support the Institute: call 1.800.665.3558, ext. 574 His current focus is on economic or e-mail: [email protected] competitiveness of jurisdictions in the Prairie provinces. Visit our website: www.fraserinstitute.org Ben Eisen is Director of Provincial Prosperity Studies at the Fraser In- Acknowledgments stitute. He holds a BA from the Uni- The authors thank Sazid Hasan for his as- versity of Toronto and an MPP from sistance gathering and analyzing the data the University of Toronto’s School of Public Policy and Governance. Mr. used in this report. They also wish to ac- Eisen has published influential stud- knowledge the anonymous reviewers for ies on several policy topics, including their comments, suggestions, and insights. intergovernmental relations, public Any remaining errors or oversights are the finance, and higher education policy. sole responsibility of the authors. As the re- He has been widely quoted in major searchers have worked independently, the Canadian newspapers. views and conclusions expressed in this pa- per do not necessarily reflect those of the Board of Directors of the Fraser Institute, Milagros Palacios is the Associate the staff, or supporters. Director of the Addington Centre for Measurement at the Fraser In- stitute. She holds a BSc in Industrial Engineering from the Pontifical Catholic University of Peru and an MSc in Economics from the Univer- sity of Concepción, Chile. She has published or co-published over 100 research studies and over 80 com mentaries on a wide range of public policy issues. fraserinstitute.org FRASER RESEARCH BULLETIN 9