Ideas

August 27, 2020

Alberta fiscal deficit hits historic high; however, economic recovery must remain the priority

Alberta’s fiscal update released this morning is sobering but unsurprising. An $11.5 billion drop in revenues from the economic shutdown, combined with $5.3 billion in additional spending-directly and indirectly related to COVID-19-caused the projected deficit to jump from $7.3 billion to just over $24 billion. This total represents an all-time high for the province, even after accounting for inflation.

That said, there was an aura of inevitability to this announcement. There have been differences of opinion on how to approach emergency COVID-19-related supports amid the economic shutdown, but there was no real debate that such measures were necessary. The Business Council of Alberta was certainly among those advocating that the government should prioritize health, safety and social support over balancing the budget.

As a result of the decline in revenues and emergency spending, Alberta’s debt has also reached a new all-time high. In total, the net debt—the total debt less financial and non-financial assets—is projected to top $64B this fiscal year. While these numbers are huge and, yes, unprecedented, the debt is not our biggest priority. Economic recovery is. The faster and stronger our recovery, the faster government revenues will rebound, helping to return Alberta to a more sustainable fiscal situation.  

One factor working in our favour is interest rates which affect the cost of government borrowing. Interest rates are so low that even a large amount of debt is relatively cheap for the government to finance. This means that while the deficit and the net total debt has increased considerably, the government could end up paying less servicing that debt than it would have otherwise. Even with the huge jump in debt this year, debt servicing costs are expected to account for less than 4% of government spending. That’s still only about one third as much as we were spending on interest payments in the mid-1990s.

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