Credit downgrade prompts fear-mongering

THE FRASER INSTITUTE – Standard & Poor’s recently announced it was once again downgrading Alberta’s credit rating – this time, by two notches, from AA to A+. No surprise, given that ratings agencies warned this could happen after the latest provincial budget was unveiled in March.
And yet, rather than addressing the long-term fiscal problems eroding the province’s credit rating, Finance Minister Joe Ceci once again chose to fear-monger, suggesting that the only alternatives to Alberta’s huge deficits are harmful and painful spending cuts. He claimed that Standard & Poor’s (S&P) wanted the government to cut $3.5 billion of spending to maintain its credit rating, and suggested that would require cutting the education budget in half.
Ceci’s invocation of a 50 per cent cut to education spending is, frankly, absurd. Cutting $3.5 billion out of this year’s budget, implemented all at once, would mean reducing total program spending from last year’s level by a little more than five per cent. That’s a significant reduction, to be sure. But the notion that achieving this would require cutting the education budget in half isn’t supportable.
In its 2016 budget, the New Democratic Party government planned to spend $50 billion on programs. To reduce its 2017 spending plan by $3.5 billion, the government would need to hold spending in 2017 to $50 billion. Of course, the government failed to stick to its spending plan last year, increasing spending.
But nevertheless, it doesn’t make much sense for the finance minister to argue that last year’s spending target would be somehow draconian if implemented today.
It’s certainly true that the government inherited serious fiscal problems from its Conservative predecessors, and there’s plenty of blame to go around for Alberta’s fiscal predicament and recent credit downgrades. While the government didn’t create the mess on its own, it’s responsible for finding a solution. That should mean identifying the least painful parts of the budget to reduce spending, not claiming that anyone arguing for spending discipline wants to gut core programs.
Unfortunately, instead of finding efficiencies (such as reducing the 7.9 per cent public-sector wage premium) and bringing Alberta’s spending more in line with revenues, the government has chosen to increase spending even as the deficit ballooned and the credit downgrades rolled in. Between 2015-16 and 2017-18, the government plans to increase spending by 11 per cent – the largest increase of any province. Had it frozen nominal program spending at 2015-16 levels, this year’s deficit would be roughly half its projected total and the budget would be on a path to balance by 2019-20.
While holding nominal program spending flat for four years would require some tough choices, the experience of Saskatchewan suggests it can be done. Consider that between 2015-16 and 2017-18, that province is reducing program spending by 1.6 per cent. And without the type of draconian cuts to core public services that Ceci claims are necessary.
If Alberta had instituted similar reductions over the same timeline, it could have run much smaller deficits, avoided billions of dollars in new debt, and been within striking distance of a balanced budget by next year, assuming revenue projections hold.
Rather than fear-mongering about spending cuts, the minister should recognize the severity of the problem that ratings agencies have identified. Instead of raising the spectre of massive disruptions to public services, perhaps he should look to Saskatchewan to see how rapid debt accumulation can be avoided through spending discipline.
Setting priorities is tough but it’s crucial to ensure Alberta’s long-term fiscal health.
-Steve Lafleur and Ben Eisen are policy analysts with the Fraser Institute’s Alberta Prosperity Initiative. Distributed by Troy Media.