A fiscal template for the Alberta government

Rachel Notley’s New Democratic government faces severe fiscal challenges it did not create, but it has an opportunity to solve them.

by Ben Eisen and Charles Lammam

Troy Media guest column

Rachel Notley’s New Democratic government faces severe fiscal challenges it did not create, but it has an opportunity to solve them. Will her NDP government clean up the fiscal mess left behind by its Progressive Conservative predecessor?

It wouldn’t be the first time.

Just next door in Saskatchewan, during the early 1990s, Roy Romanow’s NDP government inherited large deficits from the Progressive Conservatives. Romanow’s government responded successfully, eliminating the deficit in just three years, providing useful lessons for Notley’s government to consider.

The Saskatchewan NDP took office during the 1991/92 fiscal year, during which Saskatchewan ran an $843 million budget deficit. Repeated budget deficits caused a dangerous spike in net debt. Rapid spending growth under the preceding Progressive Conservatives was largely responsible for the deteriorating fiscal situation.

Romanow’s government immediately began to rein in provincial program spending. In its first budget, the government enacted policies that led to the elimination of 20 programs. The government also pursued a new approach to welfare policy, using earned income supplements and training programs to encourage social assistance recipients to re-join the labour market. As a result of these and other initiatives, provincial program spending fell by a total of 10 per cent between fiscal years 1990/91 and 1993/94.

Romanow’s approach produced outstanding fiscal outcomes, eliminating the deficit by 1994/95. In subsequent years, his government continued to exercise spending restraint and repeatedly produced surplus budgets. As a result, net debt as a share of GDP began to shrink. The improved fiscal situation meant reduced spending on debt service payments, leaving more resources available for public services and tax relief, which the NDP delivered in the late 1990s and early 2000s.

Romanow’s spending reforms are of national historic importance, as his government was the first in Canada in the 1990s to seriously respond to the public finance crisis that faced governments across the country. Romanow’s government helped pave the way for the subsequent successes of other reform-minded governments including Jean Chretien’s in Ottawa, Ralph Klein’s in Alberta, and Mike Harris’ in Ontario.

Of course, not all provincial NDP governments have produced comparable fiscal outcomes. For example, Bob Rae’s NDP government in Ontario during the early 1990s offers a stark contrast, increasing both spending and taxes, with the outcome being sluggish economic performance, record deficits and an explosion of provincial debt. If Notley’s government chooses to pursue the Rae government’s path of higher taxes and spending, Alberta will likely endure a similar fate.

Like Romanow’s NDP, Notley’s government inherits serious fiscal challenges. The province’s March 2015 budget projects the deficit to be approximately $5 billion. As was the case in Saskatchewan, overspending by the previous administration is a major cause of Alberta’s troubles. A recent analysis showed that recent provincial spending growth in Alberta significantly outstripped what would have been necessary to keep pace with inflation and population growth. If Alberta’s government had aligned spending increases with the rate of inflation plus population growth since 2004/05, program spending would have been $8 billion lower in 2013/14, and Alberta’s fiscal situation today would be drastically stronger.

This NDP government did not create Alberta’s fiscal problems, but it has an opportunity to solve them. Doing so will require spending restraint, and a responsible, prudent approach to public finances that the province has lacked in recent years.

Roy Romanow’s government during the early 1990s succeeded at the very task now facing the NDP government in Alberta — eliminating large and dangerous budget deficits left behind by a Progressive Conservative government. If Notley follows a similar policy path as the Saskatchewan NDP, prioritizing spending restraint and deficit reduction, her government can achieve similar successes and help ensure Alberta’s future fiscal and economic health.

Ben Eisen is a senior policy analyst, and Charles Lammam is director of fiscal studies at the Fraser Institute. They are co-authors of “Fiscal Policy Lessons for Alberta’s New Government from other NDP Governments.

© 2015 Distributed by Troy Media

 

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