Alberta can chart a path to prosperity by adopting my strategies to ensure its fiscal sustainability

Lennie Kaplan: How Alberta can stabilize its economyAlberta’s long-term fiscal trajectory is unsustainable. A permanent fiscal adjustment exceeding $3.7 billion by 2027-28 will be necessary to align with Premier Danielle Smith’s recently outlined long-term fiscal goals. My conclusions stem from an updated analysis of Alberta’s long-term fiscal sustainability, which incorporates the spending and revenue actions outlined in Budget 2024.

My analysis aims to address two primary inquiries: Is Alberta’s current long-term fiscal policy sustainable? If not, what magnitude of permanent fiscal adjustment is required to establish a sustainable long-term fiscal policy for the province?

Central to the sustainability assessment of Alberta’s fiscal policy are three newly established long-term fiscal anchors enunciated by the Premier. These include reducing the province’s $76 billion taxpayer-supported debt, increasing the assets of the Heritage Fund to a range of $250 billion to $400 billion by 2050, and ensuring that long-term annual operating spending increases remain below the combined rate of growth in population and inflation.

FREE CONTENT
Login
Not yet a member? Join Us
770 words
Reading Time: 4 minutes

KEEP AN EYE ON ALBERTA

Employing a more cautious business-as-usual (BAU) long-term fiscal outlook for the Alberta government, spanning 2024/25 to 2049/50, my analysis adopts a more cautious approach to forecasting revenue growth than the government’s projections. Considering the ongoing energy transition, I forecast an average price of US$70 per barrel for West Texas Intermediate (WTI) crude oil and anticipate more moderate growth in personal income tax revenue due to demographic shifts.

I also forecast non-renewable resource revenues (NRR) to gradually increase over the forecast period, with Alberta’s revenue growth averaging around three percent per year. I also assume that all annual net investment income earned by the Heritage Fund will remain within the Fund, which aligns with Alberta’s fiscal framework.

On the expenditure side, the long-term fiscal outlook projects BAU operating spending increases to align with the combined average of inflation and population growth, estimated at approximately 3.8 percent per year. This projection remains below the operating spending growth limits permitted under Alberta’s fiscal framework. Despite Budget 2024 forecasting operating spending increases for the next few years, historical trends suggest that the Alberta government often exceeds its initial spending projections, primarily due to windfall resource revenues. As a result, I’ve taken a more prudent approach, applying an average 3.8 percent annual operating spending limit to the long-term fiscal outlook.

Based on this more cautious long-term fiscal outlook, Alberta faces a narrow surplus in 2024-25, followed by projected deficits in subsequent years, culminating in a substantial deficit by 2049-50. Taxpayer-supported debt is projected to rise significantly over the forecast period.

I deem the fiscal trajectory outlined in Budget 2024 unsustainable in the long run. It fails to meet any of the targets set for the three new fiscal anchors. Adjustments are imperative to ensure fiscal sustainability, requiring careful consideration of revenue and expenditure policies to address ongoing challenges such as the energy transition and demographic shifts.

To achieve fiscal sustainability, Alberta must implement prudent fiscal policies that balance revenue and expenditure, ensuring long-term fiscal stability and resilience. This entails not only addressing immediate fiscal challenges but also planning for future uncertainties and contingencies. A comprehensive approach is needed, encompassing measures to enhance revenue generation, control spending growth, and manage debt levels effectively.

Moreover, fostering transparency and accountability in fiscal management – by providing clear and accurate information about the state of the province’s finances and engaging stakeholders in the decision-making process to promote broader understanding and support for fiscal policies – is crucial to maintaining public trust and confidence.

In addition to prudent fiscal management, Alberta must also focus on fostering economic growth and diversification – including investing in education, innovation, infrastructure, and other drivers of long-term economic development – to strengthen its revenue base and reduce dependence on volatile resource revenues.

Moreover, proactive steps must be taken to tackle demographic challenges, including an aging population, which may strain public finances due to higher demand for healthcare and other services. By planning and preparing for these demographic shifts, Alberta can mitigate their fiscal impact and ensure sustainable service delivery in the years ahead.

Achieving fiscal sustainability is a complex and multifaceted task that requires a concerted effort from policymakers, stakeholders, and the broader community. By implementing prudent fiscal policies, fostering economic growth and diversification, and addressing demographic challenges, Alberta can chart a path toward long-term fiscal stability and prosperity.

Lennie Kaplan is a former senior manager in the Fiscal and Economic Policy Division of Alberta’s Ministry of Treasury Board and Finance (TB&F), where, among other duties, he examined best practices in fiscal planning. He served as Executive Director to the MacKinnon Report on Alberta’s Finances in 2019. He recently retired from his position as Executive Director of Research at the Canadian Energy Centre.

For interview requests, click here.


The opinions expressed by our columnists and contributors are theirs alone and do not inherently or expressly reflect the views of our publication.

© Troy Media
Troy Media is an editorial content provider to media outlets and its own hosted community news outlets across Canada.