Alberta government needs a fiscal exit strategy

The following is AEG’s monthly column appearing in the December edition of Business in Edmonton Magazine. If you have tips or suggestions for future columns, please feel free to write or call.

Depending on who you talk to, the 2015 provincial budget was either an historic disaster or a total victory for Albertans. The truth is, as usual, somewhere in between.

This budget is a radical departure from those delivered by the previous Progressive Conservative government. For the first time in decades the government didn’t give a lot of consideration to reducing government spending as a response to a severe downturn. Instead, Premier Notley has decided to ride this rough patch out by increasing spending on services and public infrastructure.

Let’s consider the government’s aggressive infrastructure and capital plan. The Notley government’s decision to ramp up infrastructure spending is founded on a report by economist and former Bank of Canada Governor David Dodge. In his report to the government, included in Budget 2015 documents, Dodge argues that past governments have taken a “pro-cyclical” approach to infrastructure spending, meaning that when times were good they spent more and they cut back when times were bad.

Dodge suggests Alberta’s boom and bust cycle was made more severe by government decree and over time our infrastructure investment lagged behind other jurisdictions, leading to an “infrastructure deficit.” Dodge also points out that interest rates are at historical lows around the world, so now is the time to build.

Of course, Dodge is right – it does make sense to borrow for infrastructure and it is reasonable to share the burden of infrastructure costs with future Alberta taxpayers who will enjoy benefit from it. Alberta Enterprise Group (AEG), as a general principle, supports modest borrowing for infrastructure and we told Transportation Minister Brian Mason as much during a summer meeting.

However…and it’s a big “however”…governments aren’t businesses. A business justifies taking on additional debt for no other reason than to increase the future value of the company. Politicians, on the other hand, are driven primarily by a desire to be re-elected – and that’s where we get into trouble. Building infrastructure is a big winner for politicians. They take credit for the jobs created during construction and for the services the project will deliver. There’s no place a politician would rather be than a ribbon cutting for a new school, hospital or road.

History teaches us that, once the spending starts, it’s incredibly difficult for governments to stop it. The Lougheed and Getty governments embarked on a similar spending plan, with billions for infrastructure, economic diversification investments and enhanced public services with high taxes to match. When the province failed to grow its way out of those recurring deficits, Albertans endured a lengthy period of controversial spending reductions.

The point is that the government needs an exit strategy, and there isn’t one in the proposed budget. As has been pointed ad nauseam over the weeks since the budget was unveiled – the government is essentially basing its projections on the hope of a return to boom times. However, the government isn’t just borrowing for capital – they are borrowing to pay for basic government services for the first time in 20 years or so.

While David Dodge’s recommendations flow from solid number crunching, charts and graphs often fail to capture human nature. If history is our guide, Albertans will be in for a rough ride in just a few short years unless the government develops a plausible exit plan and executes it.

Alberta Enterprise Group is a member-based, non-profit business advocacy organization. AEG members employ more than 150,000 Canadians in all sectors of the economy.

Josh Bilyk, Alberta Enterprise Group President