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Economic ProsperityStudies in

August 2011

The Rhetoric and the Realityof Alberta’s Deficits in the

1980s, 1990s, and Nowby Mark Milke, Ph.D.

Key Conclusions

Alberta entered nine years of deficits in 1985. As of the 2011 budget, Alberta is fully three years into deficits, with forecasts for another two. Yet the political rhetoric sidesteps this problem. Rhetoric matters because it conditions taxpayers on the range of choices available to governments and the costs of those choices, costs inevitably borne by taxpayers.

Capital and operating spending was then, and is now, seen as sacrosanct.

In 1990-91, a rise in energy prices due to the Gulf War led politicians to claim they could achieve a balanced budget within the original timeframe. Likewise, citing higher energy prices today, political leaders hope they can balance the budget as previously promised.

The study recommends that Albertans acknowledge in political rhetoric the tendency toward overspending; create a Financial Review Commission to identify tax and spending reforms; rein in provincial salaries and ben-efits; enshrine into law a new balanced-budget plan; and once the budget is balanced, institute past recommendations to deposit more revenues into the Alberta Heritage and Savings Trust Fund.

Brief summary

Al most one-quar ter of Al berta’s cur rent pop u la tion ei ther was not born or did not livein Al berta dur ing the pre vi ous def i cit era (1985-1994). As a re sult, these new Al ber tans may take Al berta’s pros per ity and re cent bal anced bud gets for granted, or as sume thatdef i cits are a tem po rary prob lem caused by the re ces sion. In re al ity, this is a lon -ger-term phe nom e non cre ated by short sighted spend ing choices—no mat ter how thepol i ti cians spin it.

This paper reviews polit i cal rhet o ric from the pre vi ous def i cit era and com paresit with the pres ent, reveal ing impor tant par al lels. Between 1985-86 and 1993-94,Alberta ran nine con sec u tive def i cits. As a con se quence, Can ada’s wealth i est prov incesaw its finan cial posi tion dete ri o rate into net debt; def i cits diverted tax dol lars intointer est; and taxes were raised to finance the grow ing debt. Yet the polit i cal rhet o ricside stepped these prob lems.

Early signs indi cate opti mis tic expec ta tions about Alberta’s cur rent finances areagain in error. Alberta already faces def i cits of a mag ni tude sim i lar to those of themid-1980s to early 1990s. As before, the prov ince’s net finan cial posi tion has dete ri o -rated rap idly. And pre dict ably, the rhet o ric and ratio nal iza tions sound famil iar.

For instance: In the 1980s and more recently, the polit i cal rhet o ric empha sizedthat Alberta could “afford” def i cits given its over all net asset posi tion. In both eras,there was a net decline in pro vin cial assets. Cap i tal and oper at ing spend ing was then,and is now, seen as untouch able. In the 1980s and again recently, pol i ti cians prom isedbal anced bud gets but did n’t deliver. In both def i cit eras, pol i ti cians counted on ris ingenergy prices to bal ance the bud get for them. In both eras, pro gram growth out pacedrev e nue growth. And both eras saw a sig nif i cant rise in real per capita gov ern mentspend ing.

Point ing out these par al lels helps inform Alberta’s ever-chang ing tax payer base,and it reminds the peo ple of Alberta that polit i cal rhet o ric can not change fis cal reality.

Fra ser Insti tute 4 www.fraserinstitute.org

ii 4 The Rhetoric and the Reality of Alberta’s Deficits in the 1980s, 1990s, and Now 4 August 2011

ContentsBrief sum mary 4 ii

List of fig ures and tables 4 4

Exec u tive brief 4 5

Intro duc tion 4 8

A short his tory of the last, long def i cit era 4 11

Def i cit rhet o ric in the 1980s, 1990s and now: A com par i son 4 14Par al lel #1: “Alberta is not in debt” 4 15Par al lel #2: Both eras saw a net decline in pro vin cial assets 4 17Par al lel #3: Cap i tal and oper at ing spend ing are seen as sac ro sanct 4 18Par al lel #4: Prom ises of a bal anced bud get in four years 4 21Par al lel #5: The four-year bud get tar get is missed 4 22Par al lel #6: (Another) false start on bal anced books? 4 24Par al lel #7: Pro gram expen di ture growth out paces rev e nue growth 4 25Parallel #8: A significant rise in real per capita spending 4 28

In the later 1980s, the polit i cal rhet o ric begins to change 4 30

The 1993 sea-change in rhet o ric and action 4 31

Sum mary of the switch in rhet o ric: then ver sus now 4 34

Look ing ahead to a pre dicted bal anced bud get: The fail ure of past spend ing fore casts 4 35

Con clu sion 4 37

Rec om men da tions 4 39

Appen dix 1: Inter est costs and Alberta’s fore gone choices 4 42

Appen dix 2: The failed attempt to bal ance Alberta’s books in the 1980s with tax increases and weak en ing of the Alberta Her i tage Sav ings and Trust Fund 4 44

Ref er ences 4 46

About the author 4 53

Acknowledgements 4 53

Pub lish ing infor ma tion 4 54

About the Fraser Institute 4 56


The Rhetoric and the Reality of Alberta’s Deficits in the 1980s, 1990s, and Now 4 August 2011 4 3

List of figures and tables

Fig uresFig ure 1: Alberta’s def i cits and sur pluses, 1980/81 to 1993/94 4 12

Fig ure 2: Alberta’s net finan cial assets, 1984/85 to 2013/14 (est.) 4 17

Fig ure 3: Alberta’s rev e nues versus pro gram expen di turesGrowth between 1980/81 and 1985/86 4 26

Fig ure 4: Alberta’s rev e nues versus pro gram expen di tures Growth between 2003/04 and 2008/09 4 27

Fig ure 5: Alberta’s per capita pro gram spend ing (adjusted by infla tion), 1981/82 to 2010/11 4 29

Fig ure 6: Alberta’s debt inter est, 1985/86 to 2013/14 (est.) 4 42

Fig ure 7: Com par i sons on costs: Inter est on Alberta’s debt 1985/86 to 2003/04 4 43

TablesTable 1: Alberta’s fiscal history 1980/81 to 1985/86 4 25

Table 2: Alberta’s fis cal his tory 2003/04 to 2008/09 4 27

Table 3: Three-year tar gets on pro gram spend ing—and results 4 35

Ta ble 4: One-year fore casts on pro gram spend ing—and re sults 4 36


4 4 The Rhetoric and the Reality of Alberta’s Deficits in the 1980s, 1990s, and Now 4 August 2011

Exec u tive brief

Be tween 1985/86 and 1993/94, Al berta ran nine con sec u tive def i cits, which had sev -eral con se quences. First, Can ada’s wealth i est prov ince saw its fi nan cial po si tion de te -ri o rate into net debt by the end of that def i cit era; sec ond, the def i cits cre ated asig nif i cant, on go ing di ver sion of tax dol lars from other pur poses in or der to fi nance in -ter est costs, the amounts of which were sub stan tial; third, to fi nance the grow ing pro -vin cial debt, ex ist ing taxes were raised and new taxes im posed which raised bar ri ers toin vest ment, in come growth, and job cre ation in Al berta.

His tory may not repeat itself, but early signs and actions indi cate that opti mis ticexpec ta tions about the prov ince’s cur rent finances are likely again in error. At pres ent,Alberta already faces def i cits of a mag ni tude sim i lar to that which occurred in themid-1980s to early 1990s. Sim i larly, and as a result, the prov ince’s net finan cial posi -tion has dete ri o rated rap idly.

This paper reviews the rhet o ric in Alberta’s pre vi ous def i cit era and com pares itwith the pres ent because mod ern par al lels exist. It is clear from past research that fis -cal his tory is repeat ing itself in Alberta. This paper seeks to answer the addi tionalquery of whether rhe tor i cal his tory is repeat ing itself.

The rhet o ric and other com par i sons: The 1980s, 1990s and now

Here are some sim i lar i ties be tween the two def i cit eras:

4 “Alberta is not in debt”: In the 1980s and more recently, the polit i cal rhet o ric ini tiallyempha sized that Alberta could “afford” def i cits given its over all net asset posi tion.

4 In both eras, there was a net decline in pro vin cial assets

4 Cap i tal and oper at ing spend ing was then, and is now, seen as sac ro sanct

4 In the 1980s and again recently, the pro vin cial gov ern ment prom ised a bal anced bud -get in four years

4 The four-year bud get tar get is missed: By June 1989, the Alberta gov ern ment admit ted its ini tial def i cit esti mates were low, and that its fore cast of a bal anced bud get would be delayed one year. In a late 2010 inter view, Pre mier Stelmach announced a four-yearbal anced bud get dead line would be pushed off fur ther into the future, and in his 2011



bud get speech, Finance Min is ter Lloyd Snelgrove, also con firmed the pre vi ousfour-year bal anced bud get tar get would not be met.

4 (Another) false start on bal anced books? In 1990 and 1991, a rise in energy prices dueto the Gulf war led pol i ti cians to think a bal anced bud get might actu ally be accom -plished within the orig i nal four-year time frame. In May 2011, Pre mier Stelmachhinted the off-again four-year tar get for bal anced books might be “on” again, cit inghigher oil and gas prices.

4 Pro gram expen di ture growth out paces rev e nue growth: In the 1980s and in the mostrecent def i cit era, the first def i cit year was pre ceded by years of growth in pro gramspend ing which far out paced the growth in rev e nues.

4 A sig nif i cant rise in real per capita spend ing: In the 1990s, Alberta’s chronic def i citswere only addressed once real per capita pro gram spend ing was sig nif i cantly cut.More recently, since 1996/97, real per capita pro gram spend ing has been mostlyhigher.

By 1993, the pro vin cial gov ern ment decided a bal anced bud get would not occurunless a deter mined effort was made to rein in cur rent polit i cal assump tions and thenact on pro gram expen di tures. Attempts were made to bal ance the books before expen -di ture cuts were con sid ered. The pro vin cial gov ern ment reduced, and then entirelystopped, resource rev e nue trans fers to the Alberta Her i tage Sav ings Trust Fund andalso re-directed invest ment income earned on the fund to gen eral rev e nues. The sec -ond sig nif i cant attempt to elim i nate the def i cit came in the form of tax increases,which included an increase in the exist ing pro vin cial per sonal income tax rate, a neweight per cent sur tax on high incomes, a new “flat tax” on all incomes of one per cent,an increase in tobacco taxes and liquor mark-ups, an increase in license reg is tra tionfees, a new hotel room tax of five per cent, a new fuel tax of five cents per litre on gas o -line and die sel fuel, higher taxes for fuel used by air planes and loco mo tives, a one-third increase in the cor po rate tax rate, and an increase in the tax on insur ance pre mi ums.Despite the end of trans fers to the Her i tage Fund and the $1 bil lion in extra taxes, theprov ince still incurred a def i cit of almost $1.4 bil lion in 1987/88.

In Bud get 2011, the new tar get for a bal anced bud get was pred i cated upon sig nif -i cantly higher rev e nues between 2010/11 and 2013/14—an $8-bil lion increase in totalrev e nues, or 23.6%. On the spend ing side, Bud get 2011 fore casts spend ing to increaseonly mar gin ally in three years by $1.8 bil lion or 4.7%. How ever, if his tory is any indi ca -tion, three-year bud get tar gets are unre li able guides as to how much money the prov -ince will even tu ally spend. Thus, the result is that the bal anced bud get tar get for2013/14 is sub ject to a high-risk strat egy, and thus to another pos si ble delay.



Rec om men da tions

4 The real ity of over spend ing beyond the prov ince’s means should be acknowl edged inpolit i cal rhet o ric

4 The gov ern ment should cre ate an Alberta Finan cial Review Com mis sion to review the prov ince’s finances

4 The prov ince must exam ine the wage and ben e fits side of the bud get to arrive at a bal -anced bud get

4 The gov ern ment must insti tute a leg is lated plan to arrive at a bal anced bud get

4 It must also insti tute past rec om men da tions on future sav ings plans



Intro duc tion

Be tween 1985/86 and 1993/94, the prov ince of Al berta ran nine con sec u tive def i citswhich led to sev eral con se quences: First, Can ada’s wealth i est prov ince—with sig nif i -cant net as sets in the mid-1980s—saw its fi nan cial po si tion de te ri o rate into net debtby the end of that def i cit era; sec ond, the costs of the con tin ual “red ink” ex tended be -yond even the re turn of sur plus years. The def i cits cre ated a sig nif i cant, on go ing di ver -sion of tax dol lars from other pur poses in or der to fi nance in ter est costs, the amountsof which were sub stan tial (see ap pen dix 1); third, to fi nance the grow ing pro vin cialdebt, ex ist ing taxes were raised and new taxes im posed which raised bar ri ers to in vest -ment, in come growth, and job cre ation in the prov ince. Also, the pro vin cial gov ern -ment first re duced and then later ceased trans fers to the Al berta Her i tage and Sav ingsTrust Fund (AHSTF) in an at tempt to gar ner more rev e nue for the prov ince’s main setof books, the Gen eral Rev e nue Fund (see Ap pen dix 2).

The 1985/86-1993/941 def i cits are not so far removed from the mem ory of thosewho then lived in Alberta. How ever, since 1994, Alberta’s pop u la tion has grown to 3.8mil lion from just over three mil lion in 2004 (Sta tis tics Can ada, 2010; Alberta, 2009a).The result is that almost one-quar ter of Alberta’s cur rent pop u la tion either was notborn or did not live in Alberta prior to 1994. As a result, they may take Alberta’s pros -per ity and (recent) bal anced bud gets for granted and assume def i cits are a tem po raryphe nom e non. They may assume def i cits are only the result of the recent reces sion andits con cur rent drop in rev e nues, this as opposed to a lon ger-term phe nom e non cre -ated by ear lier spend ing choices that assumed boom-time years and rev e nues could beextrap o lated end lessly into the future. They might also assume extraor di nary resource rev e nue growth will soon res cue Alberta’s bud get ary bal ance and that lit tle atten tionneeds to be paid the spend ing side of the gov ern ment led ger. Such an assump tion is atri umph of hope over past fis cal pat terns.



1 Alberta’s fis cal years begin on April 1 and end on March 31, i.e., the 1993/94 fis cal year is between April 1,1993 and March 31, 1994.

The pur pose of this paper

To avoid a long-term re peat of the last def i cit pe riod and the pre vi ous net debt fi nan -cial po si tion, the pub lic, press, civil ser vants, and elected of fi cials would do well to re -ac quaint them selves with the choices and rhet o ric2 of an ear lier def i cit era. Rhet o ricmat ters as it con di tions vot ers on the range of choices avail able to gov ern ments andthe costs of those choices, costs in ev i ta bly borne by vot ers them selves. As it is, Al bertais al ready headed down a sim i lar path to the mid-to-late 1980s pe riod. As Pre mier EdStelmach re vealed in a late 2010 in ter view and which was con firmed in the prov ince’s2011 Bud get, a min i mum of five def i cit years is now a given (Fekete, 2010: A1).

Thus, the pur pose of this paper is to review the rhet o ric in Alberta’s pre vi ous def -i cit era and com pare it with that used today, because mod ern par al lels exist. This paper will, as part of that review, note the fis cal sta tus of the prov ince and sim i lar i ties to pastpat terns. How ever, as that fis cal ground has been well-cov ered by oth ers,3 this reviewwill con cen trate mainly on the rhet o ric and the prob lem such rhet o ric inev i ta bly pres -ents for restor ing fis cal bal ance in Alberta. It is already clear from past research thatfis cal his tory is repeat ing itself in Alberta. What this paper seeks to answer is thisrelated ques tion: Is rhe tor i cal his tory repeat ing itself?

Also, as a sec ond ary goal, this study aims to serve as a reminder that choices arenot unlim ited and that bor row ing has con se quences. Tax dol lars spent on debt inter -est in the 1980s and 1990s was money unavail able for tax relief or pro gram spend -ing—and the unavail able money was sub stan tial. In the cur rent def i cit era, the lon ger a bal anced bud get is delayed, the more options are fore gone, rang ing from sac ri ficedinvest ment income (from money not depos ited in var i ous gov ern ment sav ings funds)to fore gone pro gram spend ing options and tax relief. At pres ent, Alberta has had thelux ury of financ ing def i cits with trans fers from the Sustainability Fund. But the prov -ince’s finan cial assets are quickly erod ing and, if cor rec tive actions are not taken, areturn to bor row ing for even gen eral expen di tures will soon be next.4



2 To be clear on the def i ni tion of rhet o ric, I mean it in its non-pejo ra tive sense. Web ster’s (1989) definesrhet o ric as “the art of influ enc ing the thought and con duct of one’s hear ers” and is the mean ing used here.

3 In par tic u lar, see Bruce and Kneebone, 1997; Booth, 1995; Kneebone, 2002; Kneebone, 2006; Alberta,2007; Emery and Kneebone, 2009.

4 The prov ince has already begun bor row ing for cap i tal expen di tures. Bud get 2011 noted that $1.463 bil lion had been bor rowed for cap i tal pur poses in 2009/10, another $1.1 bil lion was planned for 2010/11, and$737 mil lion more in debt bor row ing planned for 2011/12 (Alberta 2011d, 21).

The out line of this paper

This pa per will, first, sum ma rize the pre vi ous def i cit era; sec ond, it will pres ent a de -tailed re view of rhet o ric from the 1980s, 1990s, and more re cent years to il lus trate therhe tor i cal sim i lar i ties and dif fer ences; third, it will give a de tailed anal y sis of re centand ini tial spend ing pro jec tions (ver sus ac tual re sults); fourth and last, it will pro vide a con clu sion and rec om men da tions. Two addendums, one on the choices fore gone byin ter est costs in the last def i cit era, and the at tempt to bal ance the bud get through taxin creases, ap pear at the end of the study.



A short his tory of the last, long def i cit era

In the 1980s, sim i lar to the mod ern def i cit era, the first def i cits in Al berta were as -sumed to be tem po rary.5 This was some what un der stand able as the prov ince in curredits first def i cit in 1982/83 but fol lowed it up with two sur pluses be fore an other def i citoc curred in 1985/86. Thus, the lat ter def i cit was as sumed to be a rar ity (see Al berta,2001: 58.).6 As it turned out, it was the first of nine.

Was the last def i cit era caused by a decrease in oil prices (and the accom pa ny ingcol lapse in resource rev e nues), the intro duc tion of the National Energy Pro gram(NEP), a rise in spend ing, or all three? The answer depends on the year ana lyzed.

Uni ver sity of Cal gary eco nom ics pro fes sor Ron ald Kneebone points to var i ouscauses for Alberta’s fis cal dete ri o ra tion in the 1980s. He notes how the “deep reces siondur ing fis cal years 1982 and 1983, in con junc tion with the effects of the NationalEnergy Pro gram (NEP)7 intro duced in fis cal 1981, com bined to pro duce new chal -lenges to pro vin cial bud get mak ers” (Kneebone, 2006: 4). Thus, in selected years, pro -vin cial rev e nues were adversely affected.



5 Num bers used in this study are from the fed eral Depart ment of Finance (2000 and 2010) and Alberta’sHis tor i cal Fis cal Sum mary (also known as the His tor i cal Con sol i dated Fis cal Sum mary, depend ing on thebud get year) (Alberta, 2001; 2011a), avail able in each pro vin cial bud get. Note that early bud get doc u -ments, i.e., from 1985 and until the early 1990s, may have dif fer ent num bers. Major revi sions to Alberta’sbud get account ing meth ods were part of 1993 bud get reforms intro duced by the Ralph Klein gov ern ment. They were more com pre hen sive and accu rate and thus are used here as the main basis for com par i sons inall years. Also, it should be noted that prior to 1992/93, “spend ing was recorded on an expen di ture basis,using actual cap i tal spend ing rather than cap i tal amor ti za tion costs” (Alberta, 2001: 58). Other moreminor changes also occurred around that time.

6 Bud get doc u ments from those years show an increase in pro gram spend ing, but due to dif fer ent account -ing meth ods, the increase, though still sig nif i cant, is not as large as the amounts noted in the 2001 His tor i -cal Con sol i dated Fis cal Sum mary (Alberta, 2001: 58). In 1984/85, expen di tures amounted to $9 bil lion(Alberta, 1986b: 13). In 1985/86, expen di tures amounted to $10.3 bil lion (Alberta, 1987: 30), an increase of $1.3 bil lion or 14.7 per cent in just one year. Debt ser vic ing costs are excluded in all cal cu la tions.

7 The 1980 National Energy Pro gram (NEP) was, as Toner and Doern (1986: 477) describe it, a “com pre hen -sive and polit i cally aggres sive pol icy whose stated goals were to achieve greater secu rity of sup ply, includ -ing self-suf fi ciency by 1990; increased Cana dian par tic i pa tion, includ ing 50 per cent Cana dian own er shipby 1990, and fair ness, includ ing an increased fed eral share of rev e nues.” In prac tice, this led to dis cour aged for eign invest ment and dis crim i na tory pric ing for a con sumer good from Alberta where oil for con sum ers in Can ada was not allowed to be set at the world price. Those and other mea sures led to less invest ment inthe Alberta energy indus try, higher unem ploy ment, and less rev e nue for the gov ern ment of Alberta.

In the first half of that decade, rev e nues were flat between 1981/82 and 1982/83,and again between 1984/85 and 1985/86. Rev e nues rose, some times sig nif i cantly, inother years. By 1985/86 though, pro vin cial rev e nues were almost $4.4 bil lion higher(49% higher) than in 1980/81. By 1986/87 how ever, rev e nues declined dra mat i cally (by $3.7 bil lion or 28%), due to a severe cor rec tion in oil prices the year pre vi ous and withcon se quences for the prov ince’s energy revenues.

On the other side of the fis cal led ger, spend ing cer tainly rose dur ing the first halfof the 1980s, sub stan tially so in some years.8 One impor tant rea son, as Glen Toner andBruce Doern note, is how in April 1982 “the Alberta gov ern ment announced a $5.4 bil -lion pack age of fis cal incen tives for the indus try con sist ing of roy alty reduc tions andspe cial grants and cred its, with the objec tive of increas ing rev e nue flows to the indus -try” (Toner and Doern, 1986: 478).

What ever the rea sons were for increased spend ing in other years, the first year in the nine-year string of def i cits (the 1985/86 def i cit) resulted from higher spend ingbuilt up in the first half of the 1980s. It was n’t until 1986/87 that the def i cit could beattrib uted to the sud den drop in oil prices and thus in rev e nue streams (see fig ure 1).More over, while pro gram spend ing was reduced in the two-year period between1985/86 and 1987/88, a move that some what ame lio rated the effect of dra mat i callyhigher spend ing in the first half of the decade, after reduc tions in those two years, pro -



Fig ure 1: Alberta’s def i cits and sur pluses, 1980/81 to 1993/94

*Fis cal years April to March 31.Source: Depart ment of Finance, 2001; 2010a.

8 More detail on how pro gram expen di tures ran ahead of rev e nues in the 1980s will be given in Par al lel #6,later in this paper.

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1980-81*

1981-82*

1982-83*

1983-84*

1984-85*

1985-86*

1986-87*

1987-88*

1988-89*

1989-90*

1990-91*

1991-92*

1992-93*

1993-94*

Bill

ions

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gram spend ing again rose to a new high by 1992/93 and on the assump tion the econ -omy and resource rev e nues were recov er ing.

Thus, beyond the spe cif ics of any indi vid ual bud get year, over the lon ger term,higher pro gram spend ing set the stage for chronic def i cits. The over all trend in the1980s was one where expen di tures grew quicker than rev e nues. It was not until suchunsus tain able spend ing began to be ratcheted back under then Pre mier Ralph Kleinand his new Finance Min is ter, Jim Din ning, begin ning in the 1993 cal en dar year (andreflected in the 1994 bud get year), that Alberta was on track to pro duce a sur plus,which it finally did in 1994/95.



Def i cit rhet o ric in the 1980s, 1990s,and now: A com par i son

This sec tion will in tro duce some of the po lit i cal and pol icy de bates that sur roundedAl berta’s fi nances from the mid-1980s to the mid-1990s. It is or ga nized by claim, withthe rhet o ric from the ear lier def i cit era pre sented first and then a mod ern ex am plegiven. The rhet o ric from the ear lier def i cit era is roughly chro no log i cal; sub se quentref er ences from the pres ent def i cit era are con trasted where ap pro pri ate. Di rect quo ta -tions are from bud get doc u ments and me dia re ports.9

The rhet o ric of the ear lier def i cit period reveals cer tain pol icy assump tions. Such assump tions were built upon the boom ing resource rev e nues prev a lent in the late1970s and early 1980s. Boom-era energy rev e nues were assumed to be the per ma nentstate of affairs. Spend ing pat terns fol lowed such ever-higher expec ta tions both over alland in real per capita terms.

As with the pre vi ous def i cit era, the first years in the lat est def i cit era have fol -lowed the same pat tern: A boom in resource rev e nues fol lowed by expec ta tions of per -ma nent and sig nif i cantly higher spend ing and pro vin cial bud gets pred i cated on thesame. Mean while, the polit i cal rhet o ric acted as a feed back loop to rein force all of thefore go ing. Sim i larly, the pres ent era con sis tently matches the 1980s and early 1990s inthe denial that over spend ing is a prob lem to be addressed. The miss ing com par i son,obvi ously, is the pro vin cial gov ern ment’s course from here for ward; such futurechoices remain to be seen.

The result of unsus tain able spend ing increases in the first half of the 1980s wasthat when oil prices declined sig nif i cantly in 1986, pro vin cial finances were left with asig nif i cant “over hang” of expen di tures over rev e nues, a state that would take nineyears from which to recover in annual fis cal bal ance terms and nearly 20 years for the



9 For those unfa mil iar with the pol i ti cians from the 1980s and early 1990s, Alberta’s three pre miers werePeter Lougheed (who served from 1971 until 1985), Don ald (Don) Getty (1985 to 1992), and Ralph Klein(1992 until 2006) (Leg is la tive Assem bly of Alberta, undated). Prior to 1993, an Alberta finance min is terwas known as the pro vin cial trea surer, and the trea sur ers/finance min is ters sur veyed here include LouHyndman (for the 1985 and 1986 bud get), Dick Johnston (from the 1986 bud get update until 1992), andJim Din ning (after 1993). In recent years, Ed Stelmach has served as Alberta’s pre mier since 2006, whilethe finance min is ters since 2008 have been Iris Evans (2008 and 2009), Ted Mor ton (2010), and LloydSnelgrove (2011).

(nom i nal) finan cial posi tion of the prov ince to recover.10 Both res to ra tions—the bud -get bal ance and built-up assets—only occurred after much rhe tor i cal denial about theprov ince’s chronic overspending was overcome.

Per haps two of the most strik ing attrib utes of the rhe tor i cal com ments reviewedin this sec tion are, first, the chronic delay in reduc ing his tor i cally high and unsus tain -able pro gram spend ing and repeated “misses” on when the bud get would be bal anced.As of 2011, his tory does seem be repeat ing itself in Alberta.

Par al lel #1: “Alberta is not in debt”

In the 1980s and re cently, the po lit i cal rhet o ric ini tially em pha sized that Al berta could“af ford” def i cits given its over all net as set po si tion. In 1985, Trea surer Lou Hyndmannoted the net as set po si tion of the gen eral rev e nue fund as well as the pos i tive bal ancein the Al berta Her i tage Sav ings and Trust Fund. “There are few gov ern ments in theworld that can match the fi nan cial strength of the prov ince of Al berta,” said Hyndmanin his March 1985 bud get speech (Al berta, 1985: 12).

Expec ta tions—and prom ises—of bal anced bud gets were a reg u lar pat tern in the1980s11 In 1985, in an econ omy recov er ing from the early 1980s reces sion, Trea surerLou Hyndman said that “on an aggre gate basis, this prov ince is not in debt” and that“less than one cent of every dol lar we receive in rev e nue will be required pay the inter -est on our debt” (Alberta, 1985: 27). Thus, the tone, given the mem ory of more pros -per ous times, was one of lack of con cern with the then rel a tively small pro vin cial debtgiven that the net posi tion of the prov ince was still positive.

In June 1986, in a bud get update after the pro vin cial elec tion, and using sim i larrhet o ric to that of Hyndman the year pre vi ous, a new Trea surer, Dick Johnston, toldAlber tans that, “our per capita debt is by far the low est of any Cana dian gov ern ment”(Alberta, 1986b: 9). In other words, def i cits and debt were still seen as manageable.

The rhet o ric remained the same as late as 1988. That year, Pre mier Getty stilldownplayed the sig nif i cance of the def i cit, at least when con trasted with the prov ince’s net asset posi tion. Cal gary Her ald col um nist Don Braid noted how the then pre mierfocused on Alberta’s net finan cial posi tion instead of the annual def i cit:



10 See Appen dix 2 for a dis cus sion of the attempt to bal ance the books through tax increases and AlbertaHer i tage Sav ings and Trust Fund trans fers in this period.

11 Bud get doc u ments from 1985 record small def i cits in 1984 and pre dicted the same for 1985. These wererecorded due to dif fer ent account ing meth ods (Alberta, 1985: 34). In hind sight, only one def i cit year wasrecorded, that of 1982/83 (Alberta, 2001: 58).

Pre mier Getty was be rat ing re port ers Wednes day for re cord ing these facts. Al -berta is re ally “debt- free,” he said, if you to tal up the prov ince‘s as sets and li a bil i -ties. Tech ni cally, he‘s prob a bly right. The prov ince could likely raise $13 bil lionby sell ing off some hos pi tals, parks, and pub lic build ings. The op u lent Cal garyPre mier‘s Of fice would raise a few bucks, and the leg is la ture would make a dandy loss leader. None of that will hap pen, of course. The thing that re ally mat ters isget ting rid of an nual def i cits, and then the ac cu mu lated debt. Johnston stillhopes that rev e nues will again equal ex penses by 1990. Af ter that, he says, theprov ince can be gin whit tling down the long-term debt. (Braid, 1988: A3)

Mod ern par al lelsIn more re cent times, the rhet o ric has re turned: Net as sets are noted so as to de flectcon cern over the on go ing def i cits. In Feb ru ary 2009, Fi nance Min is ter Iris Ev ans noted that, “Al berta has ab so lutely got more re sources avail able to it than any body else fac -ing a de cline” (O’Neill and Walton, 2009).

Later that same year, in early April 2009, Pre mier Ed Stelmach rejected a Uni ver -sity of Cal gary report that warned the pro vin cial gov ern ment that it faced a 1980s-style quag mire on pub lic finances12 and called it “non sense.” “Look at our bal ance sheet.We’re the only juris dic tion in North Amer ica that has cash in the bank—liq uid”(Fekete, 2009: A1). In 2010, in his first bud get speech as finance min is ter, Ted Mor tontrum peted how, over the pre vi ous 16 years, Alberta had “paid down $23 bil lion in debt[and] saved nearly $25 bil lion” (Alberta, 2010f: 2). In 2011, another new Finance Min -is ter, Lloyd Snelgrove, also boasted about how the prov ince had paid down debt andsaved bil lions of dol lars (Alberta, 2011b: 2).

The claims from Evans, Stelmach, Mor ton, and Snelgrove were cor rect, just asthey were when uttered by Hyndman, Johnston, and Getty. How ever, what mat teredand what was not addressed in the ini tial def i cit years, in both eras, was and is the factthat Alberta’s net assets were in decline pre cisely because of chronic and large def i cits.It was the trend that mat tered then, and mat ters now, which leads to a sec ond obser va -tion and par al lel.



12 The ref er ence was to the then just-released paper by Uni ver sity of Cal gary econ o mists J.C. Her bert Emery and Ron ald D. Kneebone, Will It Be Déjà Vu All Over Again? (2009).

Par al lel #2: Both eras saw a net decline inpro vin cial assets

As ac cu rate as the claims of a debt-free Al berta were in the mid-1980s (and at pres ent), the prov ince pro ceeded to in cur nine suc ces sive def i cits start ing in 1985/86. The re sult was that the prov ince’s net fi nan cial as sets, which stood at $12.6 bil lion in 1984/85, de -clined to a net debt po si tion of $8.3 bil lion (in nom i nal terms) by 1993/94. The over all(nom i nal) de cline was a $20.9 bil lion in the prov ince’s po si tion over nine years (Al -berta, 2001: 58).

Mod ern par al lelThe pat tern from the 1980s and early 1990s of de te ri o rat ing as set con di tions has latelybeen re peated. In 2007/08, Al berta’s net fi nan cial as sets were at an all-time high of$39.4 bil lion (in nom i nal terms). Since then, the de cline has been as dra matic as the1980s/1990s de te ri o ra tion. As of Bud get 2011, the prov ince fore casts that net fi nan cial



Figure 2: Alberta’s net financial assets, 1984/85 to 2013/14 (est.)

Sources: Alberta, 2001; 2011e.

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-13

Bill

ions

of d

olla

rs

Real (in 2010$) Nominal

41.0

39.4

-8.3

-12.5

25.8

12.6

18.6

19.4

as sets will reach a low of $19.4 bil lion in 2012/13—a $20 bil lion de cline13 in nom i nalterms over that five-year pe riod.14

If, as of 2011, the prov ince’s tar get of a bal anced bud get for the 2013/14 budgetyear is not achieved, the net finan cial assets of the prov ince will decline even fur ther. In 1985, Trea surer Hyndman could not have fore seen the nine years of def i cits that theAlberta even tu ally incurred. At pres ent, and as of Bud get 2011—fully three years intodef i cits15—with fore casts for another two, the pat tern is unmis tak able: Alberta is rap -idly draw ing down its sav ings as it did in the 1980s and early 1990s, and is in a dete ri o -rat ing net asset posi tion.

Par al lel #3: Cap i tal and oper at ing spend ing are seen as sac ro sanct

In his 1985 speech, Trea surer Lou Hyndman claimed that a “mas sive cap i tal bud get ofnearly $1.7 bil lion [would] main tain ex ist ing jobs and cre ate em ploy ment” (Al berta,1985: 29), i.e., that such cap i tal spend ing would keep the econ omy in health ier shapethan it would be oth er wise. Also, spend ing re duc tions were seen as anath ema:

High qual ity peo ple pro grams are sus tained; there are no cut backs. Fis cal re -spon si bil ity is main tained. A mas sive cap i tal works pro gram is pro vided while atthe same time taxes, the def i cit, and bor row ing are held down. (Al berta, 1985:29)

In April 1986 and just before an elec tion, Trea surer Dick Johnston intro duced abud get that pledged an addi tional nine per cent boost in pro gram spend ing, and con -tin ued cap i tal spend ing at roughly the same lev els as the pre vi ous two years. His jus ti fi -ca tion was that such ini tia tives were “job-cre at ing” (Alberta, 1986a: 19, 22, and 26).The higher spend ing came despite the gov ern ment’s fore cast that the Gen eral Rev e -nue fund would run a $2.1 bil lion def i cit (Alberta, 1986a: 33). There was also no anal y -sis of the oppor tu nity cost of such extra spend ing, i.e., that the money had to come



13 In fact, the pic ture is even worse: pen sion lia bil i ties are not included in the fore go ing num bers and arefore cast to be $10.2 bil lion in 2012/13 (Alberta, 2011a: 88).

14 The infla tion-adjusted decline in Alberta’s net finan cial posi tion is even more dra matic. In 2010 dol lars,the net asset posi tion declined from $25.8 bil lion in 1984/84 to a debt of $12.5 bil lion in 1993/94, a realdecline of $38.3 bil lion. In the recent def i cit envi ron ment, in 2010 dol lars, the prov ince’s net finan cialassets, which stood at $41 bil lion in 2007/08, are fore cast to decline to $18.6 bil lion by 2012/13, a realdecline of $22.4 bil lion (Source: Alberta, 2001 and 2011e; infla tion cal cu la tions from Milagros Palacios).

15 The years 2008/09, 2009/10 and 2010/11.

from some where, either bor rowed or taxed away, and thus had its own con se quencesfor the future eco nomic health of the province and employment creation.

Just two months later in June 1986, after the pro vin cial elec tion, the trea surerintro duced a bud get update and the rhet o ric was the same. In his update, Johnston pro posed a fur ther spend ing increase and more cap i tal expen di tures, even though theprov ince was now fore cast ing a $2.5 bil lion def i cit for 1986/87 (Alberta, 1986b: 5 and13). (The even tual def i cit turned out to be $4 bil lion (Alberta, 2001: 58)). Such mea -sures, the Trea surer again assured Alber tans, would “stim u late job cre ation” and“broaden our eco nomic base” (Alberta, 1986b: 5).

Mod ern par al lelsIn Al berta’s most re cent bal anced bud get (2007/08), sig nif i cantly higher spend ing wasac com pa nied by a frank ad mis sion as to its pos si ble undesirability, but there was noplan to change the pat tern. The dra matic boost in spend ing was ac com pa nied by a rhe -tor i cal ac knowl edge ment that spend ing could one day be a prob lem, but no ac tion waspro posed, only a call to “hope”:

It is a spend ing bud get, ad mit tedly... go ing for ward, we are very hope ful that thiscan be cor ralled some what,” Fi nance Min is ter Iris Ev ans told re port ers yes ter day be fore ta bling a bud get that rec om mends an in crease in spend ing of al most 12per cent from last year. (O‘Neill and Walton, 2008: A 10)

In Jan u ary 2009, Pre mier Ed Stelmach hinted that fis cal pru dence might be inorder: “I don‘t want to under es ti mate the dif fi cul ties we‘re going to face as Alber -tans…. We may go back to the same strat e gies we used in the early 1990s” (Fekete andMar tin, 2009: A1). How ever, in the same month, the pre mier appeared to retreat fromthis posi tion. He instead endorsed the notion that gov ern ment spend ing was crit i cal to the eco nomic recov ery and to the employ ment pros pects of Alber tans, as this Cal garyHer ald story from Jan u ary 2009 notes:

I never used the word cuts. I said we will go, we’ll look at ev ery avail able way of,any place that we can re duce some of our spend ing…. Are there pro grams that,or things we‘re do ing to day as gov ern ment that we can save a few mil lion dol lars? Maybe there‘s [sic] things we can de lay in terms of ex pen di tures…. But again, theprin ci ple here is to keep Al ber tans work ing. (DiAlieso, 2009: A3)

In April 2009, in a bud get speech that reviewed the pre vi ous fis cal year (and thesur prise def i cit) and which also looked ahead, Finance Min is ter Iris Evans made com -ments sim i lar to those given by Trea surer Lou Hyndman in 1985. In her 2009 address,Evans empha sized that exist ing cap i tal and pro gram expen di tures were crit i cal to



Alberta’s recov ery: “We also know that gov ern ment must main tain its sup port for theecon omy. Alber tans could expe ri ence even more tur moil if we failed to do so”(Alberta, 2009b). The Min is ter also defended exist ing lev els of pro gram spend ing: “We will main tain and enhance the ser vices Alber tans need… we will keep taxes low…and we will make invest ments to keep Alber tans work ing” (Alberta, 2009b; ellip sis inorig i nal).

In Feb ru ary 2010, Trea sury Board Pres i dent Lloyd Snelgrove con tin ued to arguethat the only two choices were def i cits, or poor health care, no road con struc tion, andhighly crowded class rooms: “See if Alber tans sup port lon ger wait ing lists, no roads, 60peo ple in the class room” (Vanderklippe, 2010: A1). Snelgrove’s rhet o ric ignored otheroptions, includ ing a smaller civil ser vice, or changes to wages, ben e fits, and pen sionpro vi sions in the pub lic sec tor, among other pos si bil i ties.

In late 2010, Alberta’s finances had dete ri o rated once again and sim i lar to cer tain years in the 1980s, the pre mier and finance min is ter said spend ing must be “con -trolled” and also indi cated that that did n’t mean “cuts.” Then-Finance Min is ter TedMor ton in Novem ber 2010 con firmed that spend ing reduc tions were not a seri ousoption, though he still talked about bal anc ing the bud get. He con tin ued to assert thatboom-era rev e nues would return and res cue the gov ern ment from its finan cial pre dic -a ment, as per the rhe tor i cal assump tions in the 1980s:

Fi nance and En ter prise Min is ter Ted Mor ton said he was more like a “fis cal mal -lard” than a fis cal hawk on Mon day in an nounc ing new fi nan cial re sults thatshow the prov ince‘s yearly def i cit inch ing over $5 bil lion. Mor ton made the com -ments to sug gest his gov ern ment was es chew ing a pred a tory ap proach to fi nan -cial plan ning, avoid ing deep cuts to core ser vices and in fra struc ture and in steadus ing the prov ince‘s sustainability fund as a shield un til the econ omy picks up.(Gerein, 2010: A6)

Sim i larly, there has been lit tle sus tained rhe tor i cal acknowl edge ment thatspend ing financed out of future tax rev e nues bor rows from the choices avail able tofuture Alber tans. Future con stricted choices include using tax dol lars to pay for debtinter est (cap i tal spend ing bor row ing), or los ing invest ment income by whit tling awayat the finan cial assets of the prov ince.

In defend ing the gov ern ment’s most recent def i cit spend ing, Trea sury BoardPres i dent Snelgrove (and finance min is ter as of 2011) has again argued that the onlychoice is between def i cits or cuts in pub lic ser vices. There has been rare men tion andno sig nif i cant action on the pos si bil ity of a freeze or reduc tion in over all wage and ben -e fits pack ages for the pub lic sec tor—the real ity for the pri vate sec tor in lean times.Such action does have the poten tial to affect pub lic ser vices, but so too does run ningcon tin ual def i cits and thus “kick ing” the prob lem down the fis cal road and incur ringgreater inter est costs.



Thus, in the lat ter part of the most recent decade, the real ity and the rhet o ricfrom the pro vin cial gov ern ment was sim i lar to that from the mid-to late 1980s on cap -i tal and pro gram spend ing. More over, in 2010, there was again no will ing ness to revisit assump tions cre ated when Alberta was at the height of a boom (when, for exam ple, in2008, the aver age annual price of oil was $100.06 WTI (West Texas Inter me di ate) andthe aver age annual price of nat u ral gas was $8.61/mcf (thou sand cubic feet of nat u ralgas) (BP, 2010: 16, 31).16 Alberta’s gov ern ment has again, for years, bud geted on a per -ma nently higher “plane” with the expec ta tion that the excep tion of boom-era rev e nueprices, and thus boom-era tax rev e nues, were to be con strued as the rule. Alberta hasalso again fallen vic tim to the errant notion that gov ern ment spend ing is the cure formany of the pri vate and pub lic prob lems that Alber tans face.

Thus, as in 1985 and in the sub se quent years until 1993, exist ing spend ing plansfor both cap i tal and oper at ing bud gets were seen as inte gral to pub lic well-being. Nodoubt some gov ern ment expen di tures were and are; how ever, in both eras, lit tleattempt was or has been given to a re-exam i na tion of pro grams that might no lon gerserve their orig i nal pur pose. Nor has there been a review of which pro grams and meth -ods of deliv ery might be revis ited with the goal of smarter, more effi cient and moreeffec tive gov ern ment. Nor were there seri ous plans to address boom-year expec ta -tions.

Par al lel #4: Prom ises of a bal anced bud get in four years

In his March 1988 bud get speech, Johnston pro claimed that a “solid re cov ery” had be -gun the year be fore (Al berta, 1988: 5). The trea surer cred ited pre vi ous spend ing: “Thisgov ern ment’s fis cal strat egy of pro vid ing ma jor stim u lus worked. Our econ omy isgrow ing again” (Al berta, 1988: 10). Still, the trea surer yet fore cast a def i cit for the up -com ing year and still in sisted a bal anced bud get would oc cur by 1990/91 (Al berta,1988: 10, 30)—the orig i nal four-year tar get as sumed by Bud get 198717 (Al berta, 1987:13).


16 At var i ous points in 2008, oil and nat u ral gas prices were both sig nif i cantly higher than noted here. Theprices quoted are the annual aver ages.

17 Thus, four fis cal years of def i cits—1986/87, 1987/88, 1988/89 and 1989/90—with the prom ised bal ancedbud get in 1990/91.

Mod ern par al lelIn 2009, Fi nance Min is ter Ev ans pre dicted a bal anced bud get by 2012/13, and thusfour years of def i cits in the in terim,18 (Al berta, 2009b: 3) thereby par al lel ing thefour-year bal anced bud get prom ises from the mid- to late-1980s. Sim i larly, in Feb ru -ary 2010, the new est Al berta Fi nance Min is ter, Ted Mor ton, re peated the pre vi ousyear’s pledge from Ev ans of a sur plus af ter four years of def i cits. He also de fended ex -ist ing pro gram and cap i tal spend ing lev els:

Bud get 2010 strikes the right bal ance be tween fis cal dis ci pline and pro tect ingcore pro grams. It en hances our com pet i tive ness by keep ing taxes low and in vest -ing in in fra struc ture for the fu ture, and po si tions us to be back in the black within three years (Al berta, 2010c).

Par al lel #5: The four-year bud get tar get is missed

By the late 1980s, Al berta Pre mier Don Getty and Trea surer Dick Johnston ce mentedtheir rep u ta tions as pol i ti cians who would con tin u ally set, and then miss, their tar getsfor bal anc ing the books. How ever, at one point in 1989, it ap peared the gov ern mentmight be closer to “black” than ini tially fore cast. The ex pec ta tion was short-lived, asthe Ed mon ton Jour nal noted:

Back in the spring of 1987, Johnston put to gether a plan to re duce the bud get aryshort fall…. Last year, thanks to stron ger than ex pected eco nomic growth, theplan leaped ahead of sched ule…. In De cem ber, Johnston was forced to re vise hisdef i cit pro jec tion to $1.37 bil lion. That fig ure now seems cer tain to zoom higher.(Ed mon ton Jour nal, 1989: A1)

By June 1989, in a post-elec tion bud get, the gov ern ment was forced to admit itsini tial def i cit esti mates were low, and that its fore cast of a bal anced bud get would bedelayed one year. The four-year tar get would be missed. Trea surer Dick Johnston saidin a news pa per report that year:

“Clearly this is a set back to our plan to move steadily to ward a bal anced bud getby 1991… I am dis ap pointed in the 1988-89 re sults.” Johnston now in sists thedef i cit will be elim i nated by 1991-92, a year later than pro jected… Johnston in -



18 Thus, four fis cal years of def i cits—2008/09, 2009/10, 2010/11 and 2011/12—with the prom ised bal ancedbud get in 2012/13.

sisted the gov ern ment has n’t aban doned its plan to bal ance the bud get. “Youwatch and see.” (Geddes, 1989: A10)

By the spring of 1992, and with its lat est bal anced bud get tar get again missed,even the pro vin cial gov ern ment pub licly admit ted bal anced bud gets were still yearsaway. But the prov ince again pinned its hopes on higher energy prices and thus higherroy alty and tax rev e nues: “Unless energy prices climb sharply, the ear li est bal ancedbud get will be 1996-97” said Trea surer Dick Johnston in his bud get speech in April1992 (Crockatt, 1992: A1). In pre dict ing a $2.3 bil lion def i cit for fis cal 1993, Johnstonagain acknowl edged the def i cit was a “very seri ous prob lem,” but after six years of def i -cits he was still avoid ing dif fi cult choices, instead yet putt ing them off by argu ing that“the prob lem can not be solved over night” (Alberta, 1992: 21).

Mod ern par al lelSim i lar to the missed bal anced bud get tar get in the later 1980s and early 1990s, in a late 2010 in ter view, Pre mier Stelmach again gave con tra dic tory sig nals on spend ing re duc -tions, both hint ing at bud get cuts and yet es chew ing them at the same time. And he an -nounced, akin to the 1991 and 1992 re ver sals by the then gov ern ment that a bal ancedbud get dead line would be pushed off fur ther into the fu ture:

“We’re go ing to trend to ward a bal anced (bud get). But what I‘m hear ing frommany Al ber tans is ‘be care ful (about steep cuts).’”… Stelmach main tained hisgov ern ment will con tinue to spend bil lions on nec es sary cap i tal pro jects, even ifit takes lon ger to bal ance the books and forces the prov ince to dip fur ther intosav ings or bor row cash. (Fekete, 2010: A1)

More over, in his 2011 bud get speech, the new est Finance Min is ter, LloydSnelgrove, con firmed the pre vi ous four-year bal anced bud get tar get would not be met. Snelgrove offered the pub lic only an either/or sce nario in ref er ence to plans to con -tinue to spend at the same lev els as before: “Do we stop invest ing in the future? Do weaban don our pri or i ties?” (Alberta, 2011b: 12).

But Snelgrove’s Mani chean rhet o ric sim pli fied the choices and implied Alber -tans could only choose between the already-planned level of gov ern ment spend ing onsocial pro grams or cap i tal pro jects, or none. Of course, the trade-offs faced by gov ern -ments are between some level of expen di tures ver sus another—not unlim ited spend -ing or its utter absence. Snelgrove also again ignored the del e te ri ous effects thatchronic def i cits have on future choices for Alber tans—on cap i tal spend ing, pro gramspend ing and the tax bur den.



Par al lel #6: (Another) false start on bal anced books?

In 1990 and 1991, a fis cal “head-fake” oc curred that led the pol i ti cians of the day tothink a bal anced bud get might ac tu ally be ac com plished within the orig i nal four-yeartime frame.

In later 1990, after Iraq invaded Kuwait and oil prices were given a tem po raryboost, it appeared that the prov ince’s books might indeed soon be in the black. Pub -licly, Pre mier Getty mused about the sooner-than-expected bal anced bud get, yet cau -tioned that this would n’t change the gov ern ment’s osten si ble com mit ment to hold ingthe line on spend ing: “The Alberta gov ern ment will con tinue to hold the line onspend ing in next year’s bud get despite wind fall oil rev e nues, Pre mier Don Getty says”read one head line that year (Cook, 1990). In another news report, the pre mier wasquoted as say ing: “Whether there are more dol lars won‘t change that plan. I‘m try ingto restrict expen di tures, not just when we find some more money, spend it… Our plans are to main tain the type of expen di ture con trol that we have main tained” (Geddes, 1990).

At bud get time in 1991, where a $33 mil lion sur plus was fore cast for the nextbud get year, the pre mier said that “Alber tans should n’t be sur prised if a pro jected bud -get sur plus of $33 mil lion ends up being a lot larger,” (Laghi, 1991: A1). The pre mierturned out to be very opti mis tic: the pro jected sur plus turned out to be a $2.6 bil liondef i cit (Alberta, 2001: 58).

Mod ern par al lelBy May 2011, the rhet o ric in the lat est def i cit era shifted once again, and in a man nerthat also par al leled the pre vi ous def i cit era. In a speech to the Al berta Weekly News pa -per As so ci a tion, Pre mier Stelmach hinted that the off-again four-year tar get for bal -anced books might be on again, cit ing higher oil and gas prices (Henton, 2011: A4).The pre mier also pledged that os ten si ble ex ist ing spend ing re straint would n’t changeshould the prov ince find more rev e nue had ac crued than orig i nally planned for in theFeb ru ary 2011 bud get. “It will help the bot tom line, but it does n’t mean we’ll in creasespend ing or change any of the long-term plans,” said Stelmach (Henton, 2011: A4).

Par al lel #7: Pro gram expen di ture growth out pacesrev e nue growth

In the 1980s and in the most re cent def i cit era, the first def i cit year was pre ceded byyears of growth in pro gram spend ing which far out paced the growth in rev e nues. Inthe 1980s, much of the growth in pro gram ex pen di tures took place in two “growth



spurts.” The first was be tween 1980/81 and 1982/83, and then be tween 1983/84 and1985/86, with ex pen di tures roughly level in only 1982/83.

In a com par i son of 1980/81 and 1985/86, pro gram spend ing was 85 per centhigher in the lat ter year—the first def i cit year. In con trast, rev e nues were only 49%higher (Depart ment of Finance, 2000, 2010).19

Over all, this dichot omy, where spend ing dra mat i cally out paced even a sub stan -tial growth in rev e nues, set the stage for what was about to come next: a nine-year-long string of def i cits (see table 1 and fig ure 3).



Table 1: Alberta’s fiscal history 1980/81 to 1985/86Total revenue growth versus growth in total program expenditures

Year* Totalrevenues

($ millions)

Year-over-year increase/

decrease(%)

Totalprogram

expenditures($ millions)

1980-81 8,922 7,496

1981-82 10,871 21.8% 8,647

1982-83 10,963 0.8% 11,704

1983-84 11,953 9.0% 11,653

1984-85 13,283 11.1% 11,809

1985-86 13,294 0.1% 13,873

1980/81 to 1985/86 increase ($) 4,372 6,377

1980/81 to 1985/86 increase (%) 49% 85%

*Fiscal years April to March 31.Sources: Department of Finance, 2000; calculations by author. First deficit year in bold.

19 For the record, it is impos si ble to assert that a drop in rev e nues was the cause of the 1985/86 def i cit. In1985/86, total rev e nues were the same as they had been the pre vi ous year, at $13.3 bil lion. Even nat u ralresource rev e nues declined only mar gin ally to $4.9 bil lion in 1985/86 from $5.2 bil lion in 1984/85 (all fig -ures in nom i nal terms from Alberta, 2001: 58). Thus, in 1985/86, a sig nif i cant rise in spend ing—over $2bil lion— was the rea son for that year’s $761 mil lion def i cit. With out that dra matic increase, the pro vin cialgov ern ment would have run a siz able sur plus that year.

In con trast to 1985/86, it was not until 1986/87, when total rev e nues plunged by almost $3.7 bil lion in oneyear due to a dra matic fall in oil prices (in 1986), that a drop in resource rev e nues could be iden ti fied as therea son for the bud get def i cit. Even then, the 1980/81-1985/86 spend ing pat tern already set the stage forsig nif i cant def i cits in Alberta. The swift decline in oil prices (reflected in 1986/87 resource rev e nue num -bers) only served to make clear the pre vi ous pat tern of spend ing beyond the prov ince’s means.

Mod ern par al lelIn Au gust 2010, re port ing on the fi nal num bers for bud get year 2009/10 (end ingMarch 31, 2010), it turned out the ini tial def i cit fore cast def i cit of $4.7 bil lion did comein at sig nif i cantly less, at just $1 bil lion. Fi nance Min is ter Mor ton cred ited tight con -trols on spend ing:

We had a plan to man age through these dif fi cult times. We stuck to that plan and it has paid off… We kept a tight rein on spend ing and drew on the SustainabilityFund to pro tect vi tal pub lic pro grams (Haggett, 2010: FP6).

But this claim was only partly accu rate and only in the con text of one year. Itignored the lon ger trend, one that pro duced sig nif i cantly higher pro gram expen di -tures that out paced rev e nue growth. Thus, in the most recent def i cit era, anothersim i lar ity to the early and mid-1980s is found: increases in pro gram spend ing sig nif i -cantly out paced rev e nue growth. Such increases both pre ceded and were a cause ofthe def i cits.

The result of the year-over-year increase in pro gram spend ing beyond rev e nuesmeant that when rev e nues declined sud denly, the pre vi ous years’ spend ing increasesalready set a sub stan tially higher base on the other side of the fis cal led ger (see table 2and fig ure 4). In a com par i son between 2003/04 and 2008/09, pro gram spend ing was



Figure 3: Alberta’s revenues versus program expendituresGrowth between 1980/81 and 1985/86*

*Fiscal years April to March 31.Sources: Depart ment of Finance, 2000; 2010; and cal cu la tions by author.

49%

85%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Revenue Program expenditures



Table 2: Alberta’s fiscal history 2003/04 to 2008/09Total revenue growth versus growth in total program expenditures

Year* Total revenues($ millions)

Year-over-year increase/

decrease(%)

Total programexpenditures

($ millions)

2003-04 25,887 21,480

2004-05 29,328 13.3% 23,851

2005-06 35,542 21.2% 26,743

2006-07 38,017 7.0% 29,292

2007-08 38,169 0.4% 33,374

2008-09 35,805 -6.2% 36,449

2003-04 to 2008-09 increase ($) 9,918 14,969

2003-04 to 2008-09 increase (%) 38% 70%

*Fiscal years April to March 31.Sources: Alberta, 2011e; calculations by author. First deficit year in bold.

Fig ure 4: Alberta’s rev e nues versus pro gram expen di turesGrowth between 2003/04 and 2008/09*

*Fiscal years April to March 31.Sources: Depart ment of Finance 2000; 2010; and cal cu la tions by author.

38%

70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Revenue Program expenditures

70% higher in the lat ter year—the first def i cit year—when com pared to 2003/04. Incon trast, rev e nues were only 38 per cent higher by that first def i cit year (Alberta,2011e: 20).20

Par al lel #8: A sig nif i cant rise in real per capita spend ing

In the 1990s, Al berta’s chronic def i cits were only ad dressed once real per ca pita pro -gram spend ing was sig nif i cantly cut. There were mar ginal reductions in the later1980s, but it would take more sig nif i cant re duc tions (which be gan in the early andmid-1990s) to bring the books into bal ance. Even with those re duc tions, spend ing wasstill his tor i cally high.21



Figure 5: Alberta’s per capita program spending (adjusted by inflation), 1981/82 to 2010/11

*Fiscal years April to March 31.Sources: Canada, Department of Finance 2001; 2010a; Alberta, 2011e; Statistics Canada, CANSIM Table 326-0021 and051-0005; and calculations by Milagros Palacios.

20 Note that the six-year period com pared in the most recent def i cit era was cho sen to cor re late with the ini -tial six-year anal y sis cho sen from the 1980s; in both cases, the choice enabled an anal y sis of the five-yearperiod imme di ately pre ced ing the first def i cit year.

21 In one sense, high per capita lev els of spend ing made it more pos si ble to bring the books into bal ance; itwas not as if the prov ince was start ing from his tor i cally low lev els of per capita spend ing. Restruc tur ingany cor po rate entity with exist ing com mit ments and expec ta tions is not with out con tro versy and oppo si -tion; nev er the less, it is more dif fi cult the closer a gov ern ment’s spend ing pat terns are to low his tor i calaver ages than when such aver ages are at or near all-time highs, as were Alberta’s in the early 1990s andnow.

9,285

10,94410,259

10,135

11,496

10,5779,648

9,6239,597

9,4628,968

9,350

8,5457,412

6,7316,4986,776

6,805

7,4347,765

8,329

7,8947,984

8,5289,135

9,3529,885

10,235

10,03410,204

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10

In 2

010$

In the 1980s and ’90s, real per capita pro gram spend ing hit a high of $11,496 in1985/86 and was pred i cated upon ear lier mis taken assump tions that boom-era rev e -nues would con tinue. Real per capita pro gram spend ing declined to a low of $6,498 in1996/97 (see fig ure 5).

Mod ern par al lelMore re cently, since 1996/97, the trend for pro gram spend ing has been mostly higher.Real per ca pita pro gram spend ing hit $10,235 in 2008/09, dipped slightly the next year, and rose again to $10,204 in 2010/11 (De part ment of Fi nance, 2000 and 2011a; Al -berta, 2011e; Sta tis tics Can ada, 2011; and cal cu la tions by Milagros Palacios).

Alberta is now con sis tently back to the his tor i cally high spend ing lev els it lastreached in the 1980s, when spend ing was sim i larly pred i cated on resource rev e nue“boom” years, not years in which rev e nues were mod er ate. The pat tern of the 1980s isvery much in evi dence.



In the later 1980s, the polit i calrhet o ric begins to change

In his March 1987 bud get speech, the pro vin cial trea surer’s tone changed from thatused in pre vi ous bud get speeches: “We must take ac tion now to re align the gov ern -ment’s fi nances,” said Dick Johnston (Al berta, 1987: 13).

Def i cits in the or der of $3 bil lion can not be al lowed to con tinue. If not checked,Al berta would find it self with more and more tax dol lars di verted from ser vicesfor Al ber tans to pay ing in ter est on debt. We would be pass ing to our chil drenand grand chil dren the re spon si bil ity of pay ing bills for the ser vices we en joy to -day… We must dis card many of the so lu tions from the past and think anew andact anew. (Alberta, 1987: 13 and 25)

So as of 1987, the rhet o ric changed. But prob lem ati cally, the bud gets of 1985 and1986 con tained the exact oppo site rhet o ric and thus had ill-pre pared the pub lic forwhat had long been the fis cal real ity, but one only rec og nized pub licly and late by thepro vin cial trea surer.

Four years later, by 1991, Trea surer Johnston intro duced a bud get that (mis tak -enly as it turned out) fore cast a $33 mil lion sur plus in the fol low ing fis cal year(1992/93). No fore cast was pro vided beyond that next year (Alberta, 1991: 32) and thepro jec tion of a sur plus bud get turned out to be incor rect. (A def i cit of $3.3 bil lion wasincurred (Alberta, 2001: 58).)

In the years between 1987 and 1991, there was some spend ing con trol. On aninfla tion-adjusted basis, Alberta’s per capita pro gram spend ing had been held con -stant between 1988 and 1990 and even declined, slightly. Infla tion-adjusted per capitaspend ing was $9,648 in 1988 but $8,968 by 1992 (Depart ment of Finance, 2000; 2010).

Still, in 1992, the new est bud get was about to boost spend ing again by almost$400 per capita, thus undo ing in one year much of the pre vi ous prog ress in whit tlingexpen di tures closer to more afford able lev els. As late as 1992, although the rhet o ric on bal -anced bud gets was there, there was still no will ing ness to revisit the flawed assump tions inplay since the late 1970s and the ramp-up in spend ing that resulted from the same.

The trea surer still saw sig nif i cant reduc tions in spend ing as unnec es sary andunde sir able. Expec ta tions cre ated by higher energy prices (and thus rev e nues) in thelate 1970s and early 1980s was cou pled with a belief that gov ern ment expen di tureswere the cure for many pub lic and pri vate prob lems and a con cur rent belief that pro -gram spend ing was sac ro sanct. A more per ma nent adjust ment to the post-1986 real i -ties had not yet been made.



The 1993 sea-change in rhet o ricand action

By 1993, the pro vin cial gov ern ment de cided that a bal anced bud get would not oc curun less a de ter mined ef fort was made to rein in cur rent po lit i cal as sump tions and thenact on the changed rhet o ric by rein ing in pro gram ex pen di tures. In May 1993, in newPre mier Ralph Klein and new Fi nance Min is ter Jim Din ning’s first bud get, and shortlybe fore an elec tion, spend ing re duc tions were the main tool em ployed to cut the def i cit(along with a rise in health care pre mi ums, one of the few taxes raised). A news pa perre port from the time de scribed the new ap proach:

Pre mier Ralph Klein‘s pre-elec tion bud get slashed spend ing by $703 mil lion,raised health care pre mi ums and elim i nated 700 more civil ser vice po si tions.Pro vin cial Trea surer Jim Din ning an nounced Thurs day no tax in creases, no newtaxes and “no give aways.” De spite the belt-tight en ing, the prov ince is left with adef i cit of $2.47 bil lion for the 1993-94 fis cal year and re cord debt-ser vic ing pay -ments of $1.4 bil lion. Last year the def i cit was $3.2 bil lion.

But Din ning prom ises to bal ance the books in the fis cal year of 1996-97 withmore se vere bud get cuts to come in the next three years. “The ex pen di ture cutswill have to go deeper… our work has just be gun,” said Din ning. (Crockatt,1993: A1)

Sim i larly, in a move that par al leled the sac ri fice the pri vate sec tor reg u larly expe -ri ences when expen di tures exceed rev e nues, the pre mier asked gov ern ment work ersto help bal ance the books. The pre mier called on employ ees “to be more pro duc tiveand work with the gov ern ment to find the best way to make cuts” (Edmon ton Jour nal,1993: A5).

The cuts were con tro ver sial in some cir cles and some expressed skep ti cism thatthe bud get could be bal anced with out wide spread tax increases. Uni ver sity of Albertabusi ness pro fes sor Allan Warrack expressed doubt: “I have dif fi culty believ ing that thegov ern ment actu ally believes it is going to remove the def i cit through expen di turereduc tion” (Pedersen, 1993: A1). Some were apo plec tic that bud get reduc tions werecho sen at all. A soci ol o gist from the Uni ver sity of Alberta attacked the gen eral lack oftax increases com bined with spend ing cuts as “rep re hen si ble” (Har ri son, 1993: A11).

Oppo si tion to spend ing reduc tions came not only from aca dem ics and theEdmon ton Jour nal. The Cal gary Her ald, in a 1994 edi to rial, ques tioned the wis dom of



spend ing reduc tions. It argued that “Klein was ada mant that ‘no soci ety has ever taxedits way back to pros per ity,’ but he showed no evi dence of any soci ety which has cre ated pros per ity solely by spend ing reduc tions” (Cal gary Her ald, 1994: A4).

The crit ics were in error. Suc ces sive bud gets in the 1980s had explic itly includedspend ing as a strat egy for eco nomic recov ery (Alberta, 1985: 29), but the recov eryturned out to have been weaker than first trum peted by Alberta’s finance min is ters(Alberta, 1988: 10). The result of attempts to stim u late the econ omy through morespend ing sim ply led to higher def i cits. In con trast to the crit ics, Finance Min is ter Din -ning called for accep tance that the pre vi ous approach had failed; Pre mier Klein calledfor gov ern ment employ ees to help in the def i cit reduc tion effort with cuts to sal a riesand increases in pro duc tiv ity:

Din ning, in an in ter view, points to 1986 as the year it be came ap par ent that Al -berta had a spend ing prob lem. The bot tom had fallen out of oil and gas rev e nues,the ma jor source of gov ern ment in come. But spend ing con tin ued. “It was at atime when we be lieved a prob lem could be solved by spend ing more money on it.We’ve learned, pain fully, that that think ing was never very ac cu rate,” says Din -ning, first elected in 1986 (Alberts and Pommer, 1993: A1).

Mod ern crit ics of spend ing reduc tions

Sim i lar to the 1980s and 1990s where “stim u lus” spend ing was ini tially fa voured bysome in the be lief it could res cue the pro vin cial econ omy, in the lat est def i cit era, somehave also ar gued that def i cit spend ing would con trib ute to an eco nomic re cov ery. InAu gust 2009, Can ada West Foun da tion Pres i dent Roger Gibbins re jected spend ingcuts as an op tion in the short-term.

Roger Gibbins, pres i dent of the Can ada West Foun da tion, is more op ti mis ticabout the prov ince‘s long-term eco nomic out look and sug gested the gov ern -ment can ride out a short-term wave of def i cits. He cau tioned that deep gov ern -ment cuts could stall eco nomic re cov ery. “My own in cli na tion is to rely on def i cit spend ing in the short term, partly be cause gov ern ments are a big con trib u tor tothe re bound of the pro vin cial econ omy.” (McLean, 2009: A1)

In 2010, the Edmon ton Cham ber of Com merce defended the def i cit not only inthe short-term; the Cham ber also wanted the gov ern ment to retain exist ing spend ingcom mit ments in future years.

The Ed mon ton Cham ber of Com merce… has come to the gov ern ment‘s de -fence, ar gu ing that not only is the re cord spend ing jus ti fied, but that this year’s



def i cit is eas ily ab sorbed by the prov ince‘s $15 bil lion sustainability fund. “TheEd mon ton Cham ber of Com merce be lieves that the rev e nue pro jec tions in thebud get are for the most part rea son able, and re lies on the gov ern ment to keep itsword in terms of fur ther spend ing in creases in the years ahead,” said a state mentfrom the cham ber’s chair, Carman McNary, on Wednes day. (Thomson, 2010: A17).

Both the his tor i cal and recent rhet o ric include a pleth ora of claims that stim u lusspend ing by gov ern ment spend ing will ben e fit the econ omy. Such assump tions over -look how money spent by gov ern ments is not cre ated out of thin air but instead musteither be bor rowed or taxed away from indi vid u als and busi nesses. In their look at therecent fed eral gov ern ment stim u lus, my col leagues Niels Veldhuis and CharlesLamman have sum ma rized the fail ure of stim u lus pro grams in this man ner:

A vast body of ac a demic re search casts se ri ous doubt on the abil ity of gov ern -ment stim u lus spend ing to boost eco nomic ac tiv ity. Last Oc to ber [2009], lead ing fis cal pol icy ex pert and Har vard Uni ver sity pro fes sor Alberto Alesina and hiscol league Silvia Ardagna con ducted a com pre hen sive anal y sis of stim u lus ini tia -tives in Can ada and 20 other in dus tri al ized coun tries from 1970 to 2007 (Alesinaand Ardagna, 2009). Their study iden ti fied 91 in stances where gov ern mentstried to stim u late the econ omy and found that un suc cess ful at tempts were basedon gov ern ment spend ing. Alesina noted that “a one per cent age point higher in -crease in the cur rent [gov ern ment] spend ing to GDP ra tio is as so ci ated with a0.75 per cent age point lower growth.” In plain Eng lish, in creased gov ern mentspend ing re duces, not in creases, eco nomic growth. (Veldhuis and Lamman,2010: 20).

Alter nately, inso far as gov ern ments bor row money, they bor row from the future, and future incomes are taxed for pres ent pur poses. In Alberta’s case, new bor row ing at pres ent has been lim ited to selected cap i tal expen di tures. The remain ing def i cit gaphas been financed by with draw als from the prov ince’s Sustainability Fund. How ever,such with draw als restrict future choices. Impor tantly, these future choices may bemade in an econ omy where Alberta’s nat u ral resources have either sub stan tiallydeclined or are less val ued by the mar ket place.



Sum mary of the switch in rhet o ric:then ver sus now

Ini tially, in the early 1980s, boom ing re source rev e nues (along with per sonal and cor -po rate tax re ceipts that flowed in the wake of strong re source prices) led policymakersand the pub lic to be lieve per ma nently higher spend ing could be sus tained in def i nitely.The rhet o ric flowed from as sump tions that rev e nues would al ways rise to com pen satefor the above-in fla tion and above-pop u la tion growth in pro gram spend ing. That leftthe prov ince vul ner a ble to sig nif i cant, chronic def i cits once rev e nues did not matchex pec ta tions. The gov ern ment changed course in 1993.

In the more recent def i cit era, suc ces sive finance min is ters and the pre mier,while giv ing an occa sional nod in the direc tion of bal anced bud gets, have done lit tle toset Alberta’s finances on the course to reach a sur plus. Even the most recent bud get,Bud get 2011, which osten si bly mod er ates the spend ing increases in sub se quent years(total pro gram expenses are fore cast to rise by only $69 mil lion in 2011/12 from thepre vi ous year, $497 mil lion from 2011/12 to 2012/13, and just $223 mil lion from2013/14—the year in which the bud get will osten si bly bal anced) is built upon ques -tion able assump tions. Past pro vin cial gov ern ment spend ing pat terns where such good inten tions are later swept away by sub stan tially higher spend ing, cast doubt on thelike li hood of the lat est bal anced bud get tar get. Unlike 1993, the recent rhet o ric thatdoes exist on the need to restore fis cal bal ance in Alberta has not been matched by theactions and plans nec es sary to reach that end.



Look ing ahead to a pre dictedbal anced bud get: The fail ure of past spend ing fore casts

In Bud get 2011, Fi nance Min is ter Lloyd Snelgrove pre dicted a bal anced bud get by2013/14 (Al berta, 2011b: 4) one year later than the tar get re peated by Pre mier EdStelmach over sev eral years and as prom ised by for mer fi nance min is ters Iris Ev ans in2009 and Ted Mor ton in 2010 (Al berta, 2009a; 2010c). Prob lem ati cally, how ever, inBud get 2011, the new tar get for a bal anced bud get was pred i cated upon sig nif i cantlyhigher rev e nues be tween 2010/11 and 2013/14—an $8 bil lion in crease in to tal rev e -nues, or 23.6 per cent. On the spend ing side, Bud get 2011 fore casts spend ing to in -crease only mar gin ally in three years—by $1.8 bil lion or 4.7 per cent.

How ever, if his tory is any indi ca tion, three-year bud get tar gets are unre li ableguides as to how much money the prov ince will even tu ally spend.

4 In the case of three-year tar gets for pro gram spend ing, only the 2008 bud get cameclose to the orig i nal tar get for a bud get year three years hence. When the books wereclosed on the 2010/11 year, only one per cent more was spent rel a tive to the orig i naltar get (Alberta, 2008; 2011e). In all other years, actual pro gram spend ing exceeded tar -gets by ranges of 8.0 to 21.2 per cent (see table 3) (Alberta, 2004; 2005; 2006; 2007b;



Table 3: Three-year forecasts on program spending—and results, 2004 to 2008 budgets

Total program expense(in $ millions)

For: Target Actual Difference Difference(in %)

Budget 2004 2006/07 23,079 29,292 6,213 21.2%

Budget 2005 2007/08 26,589 33,374 6,785 20.3%

Budget 2006 2008/09 29,903 36,449 6,546 18.0%

Budget 2007 2009/10 33,567 36,470 2,903 8.0%

Budget 2008 2010/11 37,581 37,969 388 1.0%

Targets from annual provincial budgets.Actual program expenses from Alberta 2011e.

2011e). In other words, in five out of five years, the prov ince spent more—in mostyears, sig nif i cantly more—than pro jected in its three-year plans.

4 Alberta’s one-year fore casts are a more reli able guide than the three-year tar gets, atleast recently. In the seven most recent bud get years for which a one-year fore cast canbe com pared with actual results, three years came in under bud get (at roughly one per -cent less than planned), while four were over bud get by ranges of 1.4 to 6.6 per cent (see table 4) (Alberta, 2004; 2005; 2006; 2007b; 2008; 2009c; 2010a; 2011e).

The con clu sion is clear: three-year spend ing “tar gets” are an unre li able guide tofuture spend ing because they under es ti mate such spend ing.The result is that the bal -anced bud get tar get for 2013/14 is sub ject to a high-risk strat egy, and thus to anotherpos si ble delay.



Table 4: One-year forecasts on program spending—and results, 2004 to 2008 budgets

Total program expense(in $ millions)

For: Forecast Actual Difference Difference (in %)

Budget 2004 2004/05 22,286 23,851 1,565 6.6%

Budget 2005 2005/06 25,535 26,743 1,208 4.5%

Budget 2006 2006/07 28,067 29,292 1,225 4.2%

Budget 2007 2007/08 32,914 33,374 460 1.4%

Budget 2008 2008/09 36,783 36,449 -334 -0.9%

Budget 2009 2009/10 36,838 36,470 -368 -1.0%

Budget 2010 2010/11 38,376 37,969 -407 -1.1%

Estimates from annual provincial budgets.Actual program expenses from Alberta 2011e.

Con clu sion: A caveat and apos si bil ity—his tory is not guar an teed to repeat itself

In any at tempt to re mind policymakers, the pub lic, and the me dia about the choicesavail able to gov ern ments and his tor i cal mis takes to avoid, as sump tions about his toryin ev i ta bly af fect de ci sion-mak ing. Two his tor i cal ori en ta tions, one de ter min is tic andone that pro vides for hu man free dom and ac tion are rel e vant here. In 1832, the Ger -man phi los o pher Georg Wil helm Friedrich Hegel as serted that, “What ex pe ri ence and his tory teach is this—that peo ple and gov ern ments never have learned any thing fromhis tory, or acted on any prin ci ple de duced from it” (Bart lett, 1992: 372). A less de ter -min is tic view of his tory came from George Santayana in a phrase that has now be come a cliché. In 1905, he ob served that, “Those who do not re mem ber the past are con -demned to re live it” (Shirer, 1960: viii). For those who would pre fer to con sider theAl berta gov ern ment’s fi nan cial sit u a tion in light of the lat ter ob ser va tion,Santayana’s cau tion may be less about not for get ting Al berta’s past than about ed u -cat ing youn ger and newer Al ber tans about the prov ince’s his tory.

In the pre vi ous def i cit era, Pre mier Don Getty and later Pre mier Ralph Klein pre -sided over nine years of def i cits. In the Getty years, fore casts for a bal anced bud getwere con tin u ally pushed back. The same pat tern has emerged now. As recently asNovem ber 2010, then Finance Min is ter Ted Mor ton pre dicted a bal anced bud getwithin a few years: “We will con tinue to con trol what we can and we are resolved toget ting back in the black in 2012-13” (Alberta, 2010e).

How ever, one month later, Pre mier Ed Stelmach informed Alber tans that theprov ince’s bud get will not be bal anced that year (Fekete, 2010: A1). In Feb ru ary 2011,new Finance Min is ter Lloyd Snelgrove con firmed the planned sur plus would bedelayed until 2013/14 (Alberta, 2011b: 4). In his Bud get 2011 speech, the min is terclaimed that “because the reces sion hit Alberta harder than first thought, rev e nues arenot pro jected to be as high, this year and next, as fore cast a year ago,” and thus impliedthe same rea son for the delayed bal anced bud get (Alberta, 2011b: 4). Absent from hisremarks was any his tor i cal under stand ing or anal y sis of how ever-ris ing real per capitaspend ing played into the inev i ta bly of Alberta’s new est def i cit era.

As a result, as of the 2010-2011 Annual Report released in June 2011, the prov -ince is still bud get ing for a min i mum of five def i cit years (three already incurred). Ifpres ent pro jec tions hold—and past multi-year tar gets on spend ing have under es ti -mated spend ing—“red ink” dur ing the five def i cit years will total at least $9.4 bil lion. In



June, Finance Min is ter Snelgrove sounded a cau tion ary note remark ing that, “Thehealth of the world econ omy, par tic u larly in the United States and Europe, remainsuncer tain,” but he still went on to trum pet the net finan cial assets of the prov ince(Alberta, 2011f). His rhet o ric was sim i lar to that of pre vi ous finance min is ters and1980s-era trea sur ers. All failed to men tion the rapid decline of those same finan cialassets due to chronic def i cits.

In con trast to 1993, the recent rhet o ric on spend ing and def i cit con trol isnowhere near as con stant or as firm as that which began in the late 1980s and early1990s under Pre mier Ralph Klein and Finance Min is ter Din ning. In today’s cli mate,pol i ti cians and policymakers must rec og nize that ear lier bud get assump tions werebuilt on inflex i ble approaches to revis it ing selected gov ern ment spend ing and onassump tions about extraor di nary “boom” years, rather than on more rea son able rev e -nue streams. It is essen tial that both cur rent rhet o ric and cur rent spend ing bereformed to match actual budgetary realities and revenues.



Rec om men da tions

Rec om men da tion 1: The real ity of over spend ingbeyond the prov ince’s means should be acknowl edged in polit i cal rhet o ric

This study com pares the po lit i cal rhet o ric in the pre vi ous def i cit era with that in thepres ent def i cit years. Thus, the first rec om men da tion is that the re al ity of over spend -ing be yond the prov ince’s means be ac knowl edged in prov ince’s po lit i cal rhet o ric. Al -berta’s un sus tain able spend ing is ob vi ous from ever-in creas ing real per ca pitaspend ing; pro gram spend ing reg u larly out paced rev e nue growth in the years lead ingup to Al berta’s def i cits; Al berta’s def i cits are thus chronic; the prov ince’s net fi nan cialas sets are de te ri o rat ing; and lastly, such def i cits will likely not be elim i nated with outspend ing re forms.

Rec om men da tion 2: Cre ate an Alberta Finan cial ReviewCom mis sion to review the prov ince’s finances

Sim i lar to 1993, the prov ince should com mis sion an Al berta Fi nan cial Re view Com -mis sion to re view the prov ince’s fi nances and rec om mend changes to Al berta’s tax a -tion and spend ing struc ture. This was also the course take in 1995 by fed eral Lib eralFi nance Min is ter Paul Mar tin, who ini ti ated a thor ough re view of fed eral spend ing(Veldhuis, Clem ens, and Palacios, 2011: 19-29). “We are act ing on a new vi sion of therole of gov ern ment… smaller gov ern ment… smarter gov ern ment,” said Mar tin in1995 when he made a non-ideo log i cal and non-par ti san ar gu ment about the sim plemath of def i cits that year: “The debt and def i cit are not in ven tions of ide ol ogy. Theyare facts of arith me tic. The quick sand of com pound in ter est is real” (Mar tin, 1995: 2).

Rec om men da tion 3: Exam ine the wage and ben e fitsside of the bud get

Gov ern ments that wish to bal ance their bud gets can not ig nore the fact that sal a riesand ben e fits are the larg est part of any gov ern ment’s bud get. In 1993, the prov ince re -



duced the num ber of civil ser vants by 2,575 po si tions, or 7.6 per cent of the civil ser vice(Al berta, 1993b: 34). It also in sti tuted an across-the-board wage re duc tion for all em -ploy ees of 5 per cent (Al berta, 1994: 10). If Al berta is to re store its bud get bal ance,short-, me dium-, and long-term re views of that ex pense must be part of any bal ancedbud get goal—if tax in creases are to be avoided.

There are var i ous ways to accom plish such an end with min i mal dis rup tion; theyneed not nec es sar ily involve all the above actions or the degree to which they werenec es sary in the 1990s. Also, in the 1990s, much of the civil ser vice reduc tion wasaccom plished through attri tion (Alberta, 1993b: 34). Nev er the less, options for a bal -anced bud get should include attri tion, wage freezes or reduc tions, vol un tary rene go ti -a tion of exist ing con tracts if nec es sary, and lon ger-term changes to pen sionobli ga tions which would move them from defined ben e fit plans (and their inher entlia bil i ties) to defined con tri bu tion plans. While the gov ern ment has ini ti ated a hir ingfreeze, it has not made the struc tural changes to employ ment lev els or to sal ary andpen sion obli ga tions that would sub stan tially lighten future fis cal obli ga tions. All suchoptions should be con sid ered.

Rec om men da tion 4: Insti tute a leg is lated plan to arriveat a bal anced bud get

In the 1993 bud get, the gov ern ment of the day set out a four-year plan to bal ance thebooks and it in cluded a bal anced bud get law and a plan to re duce spend ing over fouryears by 20 per cent, start ing with a 5.5 per cent re duc tion in the first year (Al berta,1993b: 11). At pres ent, based upon Bud get 2011, no such plan ex ists. Also, in con trastto the 1993 bud get, which set out a leg is la tive guide line on spend ing tar gets (the Al -berta Def i cit Elim i na tion Act (Al berta, 1993a: 10)), there are no leg is lated tar gets inBud get 2011 to ar rive at a bal anced led ger.

Rec om men da tion 5: Insti tute past rec om men da tions on future sav ings plans

Var i ous an a lysts and or ga ni za tions, in clud ing this au thor (Milke, 2006) have rec om -mended that the prov ince de posit sig nif i cantly more of its re source rev e nues into theAl berta Her i tage and Sav ings Trust Fund (AHSTF). The prov ince it self com mis sioneda re port on the mat ter and cre ated the Al berta Fi nan cial In vest ment and Plan ning Ad -vi sory Com mis sion for such pur poses, which re ported in 2007 (Al berta, 2007a). Thepro vin cial com mis sion, chaired by Jack Mintz, rec om mended among other goals, a



tar get of $100 bil lion in net fi nan cial as sets to be put into a re in vig o rated Al berta Her i -tage Fund by 2030; sav ing a fixed per cent age of Al berta’s to tal rev e nues each year aspart of the bud get, and in sti tut ing strong leg is la tion to re in force Al berta’s com mit -ment to sav ing (Al berta, 2007a). In short, once Al berta’s bud get is bal anced, the gov -ern ment should take its own com mis sioned ad vice on such mat ters.



Appen dix 1: Inter est costs andAlberta’s fore gone choices

In the 1980s and 1990s, the re sult of nine con sec u tive def i cit years meant that fis cal re -sources oth er wise avail able for low ered taxes, or pro gram and in fra struc ture spend -ing, were in stead di rected to fi nance the debt (see fig ure 6). An nual debt ser vic ingcosts rose to over $1.7 bil lion by 1994/95 from $182 mil lion in 1985/86 (Al berta, 2001:58; Al berta, 2010a: 89; and cal cu la tions by au thor).

Alberta’s tax pay ers spent almost $19.7 bil lion in inter est on the pro vin cial debtbetween 1985/86 (Alberta’s first def i cit year) and 2003/04, (when the pro vin cial debtwas paid off). That $19.7 bil lion was equiv a lent to any one of the fol low ing (see fig ure 7):

4 More than all of the pro vin cial per sonal income tax col lected between 1985/86 and1992/93 ($18.7 bil lion).

4 More than all of the cor po rate income tax col lected between 1985/86 and 2001/02($19 bil lion).

4 More than the pro vin cial gov ern ment spent on social ser vices between 1985/86 and1997/98 (just over $19.6 bil lion) (cal cu la tions by author based on Alberta, 2001: 58;and Alberta, 2010a: 89)



Figure 6: Alberta’s debt interest, 1985/86 to 2013/14 (estimate)

Source: Depart ment of Finance, 2001; Alberta, 2011a; Alberta, 2011e.

0.20.3

0.6

0.8

1.1

1.31.3

1.4

1.71.7

1.7

1.5

1.31.4

1.01.0

0.8

0.5

0.30.3

0.20.2

0.20.2

0.20.3

0.60.6 0.6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1985-86

1987-88

1989-90

1991-92

1993-94

1995-96

1997-98

1999-00

2001-02

2003-04

2005-06

2007-08

2009-10

2011-12

2013-14

$ Bi

llion

s

Policymakers, the pub lic, the media, and pol i ti cians have legit i mate dis agree -ments with each other as to what con sti tutes pru dent tax lev els and pru dent spend ing.What is ines cap able is the math of chronic def i cits: chronic def i cits mort gage pres entand future gen er a tions and severely limit their choices. Inso far as debts are cre ated,increas ing num bers of tax dol lars are used not for tax reduc tions, social pro grams, orcap i tal pro jects, but sim ply to pay bond hold ers.

Some argue that chronic def i cits are less prob lem atic when inter est rates are lowand the growth of the tax base is high, as that com bi na tion results in a lower-debt-to-GDP ratio even with out debt repay ment. How ever, that sce nario still leaves debt tobe financed. Tax dol lars used for that financ ing are diverted from either tax relief orspend ing.

With the excep tion of some bor row ing for cap i tal spend ing (Alberta, 2010b:109), Alberta is not yet financ ing most of its spend ing through increased debt. How -ever, if assump tions pred i cated on pre vi ous boom-era rev e nues per sist, such a state ofaffairs will not last any more than they did in the 1980s. In the interim, other choicesare fore gone, includ ing depos its into the Alberta Her i tage Sav ings and Trust Fundwhich are meant to secure future gen er a tions and their choices when Alberta’sresources are either no lon ger as valu able in the mar ket place or when they have sub -stan tially declined.22



Fig ure 7: Cost com par i sons—inter est on Alberta’s debt 1985/86 to 2003/04

Sources: Alberta 2001; 2010a; cal cu la tions by author.

22 Sev eral stud ies from the sur plus years urged the prov ince to build up its Her i tage Fund (see Milke, 2006;Gibbins and Roach, 2006; and Alberta, 2007).

19.7 19.6 18.7 19.0

0.0

5.0

10.0

15.0

20.0

25.0

Debt interest1985/86- 2003/04

Social service spending1985/86-1997/98

PIT revenue1985/86-1992/93

CIT revenue1985/86-2001/02

$ B

illio

ns

Appen dix 2: The failed attempt to bal ance Alberta’s books in the1980s with tax increases and theweak en ing of the Alberta Her i tageSav ings and Trust Fund

In the 1980s, at tempts were cer tainly made to bal ance the books be fore ex pen di turecuts were con sid ered. For swear ing cuts in pro gram ex pen di tures, the prov ince usedtwo other mea sures to staunch the flow of red ink: It re duced and then en tirelystopped re source rev e nue trans fers to the Al berta Her i tage Sav ings Trust Fund(AHSTF or “Her i tage Fund”) and also re-di rected in vest ment in come earned on thefund to gen eral rev e nues; it also in creased taxes, sig nif i cantly.23

The sec ond sig nif i cant attempt to elim i nate the def i cit came in the form of taxincreases. “We will increase taxes sub stan tially at the out set of this def i cit reduc tionplan,” said Trea surer Dick Johnston in his March 1987 bud get address (Alberta, 1987:13). Tax increases included an increase in the exist ing pro vin cial per sonal income taxrate, a new eight per cent sur tax on high incomes, a new “flat tax” on all incomes of oneper cent, an increase in tobacco taxes and liquor mark-ups,24 an increase in license reg -is tra tion fees, a new hotel room tax of five per cent, a new fuel tax of five cents per litreon gas o line and die sel fuel, higher taxes for fuel used by air planes and loco mo tives, aone-third increase in the cor po rate tax rate, and an increase in the tax on insur ance



23 By way of back ground, the Her i tage Fund was cre ated in 1976 as a “sav ings account” for a por tion ofnon-renew able resource rev e nues col lected by the prov ince. The prac tice prior to 1983/84 was to splitnat u ral resource rev e nues with 70 per cent directed towards gen eral rev e nues (i.e., the pro vin cial bud get)and 30 per cent to the Her i tage Fund. The Her i tage Fund also retained all income cre ated within the funditself. After 1983/84, the prov ince retained 85 per cent of all resource rev e nues and thus trans ferred just 15per cent of those rev e nues to the Her i tage Fund. Also, post-1983/84, all income cre ated in the fund itselfwas now trans ferred to the Gen eral Rev e nue Fund (Alberta, 1986a: 11). As of 1987/88, the pro vin cial gov -ern ment decided to retain 100 per cent of resource rev e nues for the prov ince’s bud get (Alberta, 1987: 14).

24 It is worth not ing that while Alberta’s pri vat iza tion of all gov ern ment liquor stores (begun in 1993 andcom pleted by 1994) is well-known, less known is how Alberta con tin ued to apply mark-ups beyond justliquor taxes to the retail sale of alco holic bev er ages—a fact often over looked by oppo nents of liquor storepri vat iza tion else where in Can ada who wrongly inform the pub lic and gov ern ments that pri vat iza tion and rev e nue losses are syn on y mous. They are not, as Alberta’s exam ple dem on strates: mark-ups can stay evenwhen such bev er ages are sold in pri vate retail stores.

pre mi ums. In total, the increased and new taxes were expected to bring in extra rev e -nue of $1 bil lion in 1987/88 (Alberta, 1987: 20-22), or about 12.5 per cent of all own-source rev e nues the prov ince had accrued in the year pre vi ous (Alberta, 2001: 58).

Despite the end of trans fers to the Her i tage Fund and the $1 bil lion in extra taxes, the prov ince still incurred a def i cit of almost $1.4 bil lion in 1987/88 (Alberta, 2001:58.) With the excep tion of 1985/86, that was the small est def i cit year among all of thenine con tin u ous def i cit years. The “ele phant in the room” was a spend ing pat tern builtup in the boom years that was unsus tain able and led to def i cits. It was not until theunder ly ing assump tions about spend ing were addressed (begin ning much later, in 1993)that bal anced bud gets returned and then not until 1994/95 (Alberta, 2001).

That Alberta’s boom-era spend ing pat tern was the main rea son for the prov -ince’s def i cits was not a sur prise. Bud get doc u ments had long noted Alberta’sabove-pro vin cial aver age spend ing on pro grams. In his 1988 bud get speech, the pro -vin cial trea surer remarked that “even with the expen di ture and tax mea sures imple -mented in the last bud get, Alberta con tin ues to have the high est per capita spend ingon ser vices…”(Alberta, 1988: 11).

Sim i larly, but more crit i cally, near the end of the first def i cit era, the pro vin cialgov ern ment com mis sioned a review of the prov ince’s finances. In its 1993 report, the Alberta Finan cial Review Com mis sion sum ma rized the his toric prob lem withAlberta’s finances: “The prov ince is spend ing more than it can afford, has done soevery year for the last eight years, and the rate of over spend ing is increas ing” (Alberta,1993a: 8).

One cause of the over spend ing was the assump tion already noted—that boom-era spend ing pat terns would be sus tained by boom-era rev e nues to match, eventhough over time the lat ter had never been able to fully sup port the for mer. A sec ondassump tion at play was that pub lic (tax) dol lars could solve any pub lic or pri vate prob -lem if spent in great enough quan tity and with the appro pri ate direc tion. The sec ondassump tion was implicit and explicit in the debates of the 1980s. Such an assump tionwas noted by the finance min is ter who even tu ally reined in Alberta’s unsus tain ablespend ing. In a 1993 inter view, Jim Din ning pointed to high gov ern ment spend ing asthe pri mary cause of suc ces sive def i cits, a pre dic a ment caused by the sec ond assump -tion: “It was at a time when we believed a prob lem could be solved by spend ing moremoney on it. We’ve learned, pain fully, that that think ing was never very accu rate”(Alberts and Pommer, 1993: A1).

The con clu sions from Johnston, the Review Com mis sion and Din ning were but -tressed by a review of Alberta’s spend ing pat terns over three decades and mea sured incon stant (2010) dol lars. The pro vin cial gov ern ment spent $9,285 per per son on pro -grams in 1981/82 and sub stan tially more by 1985/86 ($11,496). Even with sub se quentdecreases to $9,597 by 1989/90, real per capita pro gram spend ing was still above where such spend ing had been at the begin ning of the decade.



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Fekete, Ja son, and Don Mar tin (2009, Jan u ary 16). Deep spend ing cuts pos si ble inAl berta; Stelmach warns of ‘90s-style pol i cies. Cal gary Her ald: A1.

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About the author

Mark Milke, Ph.D., is the di rec tor of Al berta Pol icy Stud ies and the Al berta Pros per ityIni tia tive for the Fra ser In sti tute; he is also chair man of the Ca na dian Jour nal of Ideas,an oc ca sional lec turer in Po lit i cal Phi los o phy and In ter na tional Re la tions at the Uni -ver sity of Cal gary, and a Sunday col um nist for the Cal gary Her ald. His col umns havealso ap peared in the Na tional Post, To ronto Star, Globe and Mail, Ot tawa Cit i zen,Mon treal Ga zette, Van cou ver Sun, and Win ni peg Free Press. His pub lic pol icy pa persin clude stud ies of on en ergy-pro duc ing coun tries and hu man rights, fed eral-pro vin -cial trans fer pay ments, au to mo bile in sur ance, tax payer sub si dies for po lit i cal par ties,the flat tax, cor po rate wel fare, air line com pe ti tion, and the Can ada Pen sion Plan. He isthe au thor of three books in clud ing Tax Me I’m Ca na dian: Your Money and How Pol i -ti cians Spend It. Dr. Milke has an M.A. from the Uni ver sity of Al berta, where his the sisan a lyzed hu man rights in East Asia; he also has a Ph.D. from the Uni ver sity of Cal gary,where his doc toral dis ser ta tion an a lyzed the rhet o ric of Ca na dian-Amer i can re la tions.

Acknowl edge ments

Thanks to Nadeem Esmail, Dr. Ron ald Kneebone, and Niels Veldhuis for their com -ments and re view of early drafts of this pa per. Re spon si bil ity for any con clu sions is myown.



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ISSNISSN 1706-8983 (print); ISSN 1706-8991 (on-line)

Date of issueAu gust 2011

Cita tionMilke, Mark (2011). The Rhet o ric and the Re al ity of Al berta’s Def i cits in the 1980s,1990s, and Now. Stud ies in Eco nomic Prosperity. Fra ser In sti tute.

Editing and pro duc tionKristin McCahon

DesignLindsey Thomas Mar tin

Cover designBill Ray

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Pro fes sor Armen AlchianPro fes sor Terry L. Ander sonPro fes sor Rob ert BarroPro fes sor Michael BlissPro fes sor James M. Buchanan† Pro fes sor Jean-Pierre CentiPro fes sor John ChantPro fes sor Bev DahlbyPro fes sor Erwin DiewertPro fes sor Ste phen EastonPro fes sor J.C. Her bert EmeryPro fes sor Jack L. GranatsteinPro fes sor Her bert G. GrubelPro fes sor James GwartneyPro fes sor Ron ald W. Jones

Dr. Jerry Jor danPro fes sor Ross McKitrickPro fes sor Michael ParkinPro fes sor Friedrich Schnei derPro fes sor Law rence B. SmithMr. Vito Tanzi

Past mem bersPro fes sor Friedrich A. Hayek*† Pro fes sor H. G. John son*Pro fes sor F. G. Pennance*Pro fes sor George Stigler*† Pro fes sor Edwin G. West*Sir Alan Walters*

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