By Tegan Hill and Milagros PalaciosWhether due to U.S. tariffs or lower-than-expected oil prices, the Smith government has repeatedly warned Albertans that despite a $4.6 billion projected budget surplus in 2024/25, Alberta could soon be in the red. To help avoid this fate, the Smith government must restrain spending in its upcoming 2025 budget.These are not simply numbers on a page; budget deficits have real consequences for Albertans. For one, deficits fuel debt accumulation. And just as Albertans must pay interest on their own mortgages or car loans, taxpayers must pay interest on government debt. Each dollar spent paying interest is a dollar diverted from programs such as health care and education, or potential tax relief. This fiscal year, provincial government debt interest costs will reach a projected $650 per Albertan. And while many risk factors are out of the government’s direct control, the government can control its own spending.In the 2023 budget, the Smith government committed to keep the rate of spending growth to below the rate of inflation and population growth. This was an important step forward after decades of successive governments substantially increasing spending during good times — when resource revenues (including oil and gas royalties) were relatively high (as they are today) — but failing to rein in spending when resource revenue inevitably declined.But here’s the problem. Even if the Smith government sticks to this commitment, it may still fall into deficit. Why? Because this government has spent significantly more than it originally planned in its 2022 mid-year plan (the Smith government’s first fiscal update). In other words, the government’s “restraint” is starting from a significantly higher base level of spending. For example, this fiscal year it will spend $8.2 billion more than it originally planned in its 2022 mid-year plan. And inflation and population growth only account for $3.1 billion of this additional spending. In other words, $5.1 billion of this new spending is unrelated to offsetting higher prices or Alberta’s growing population. Because of this higher spending and reliance on volatile resource revenue, red ink looms.Indeed, while the Smith government projects budget surpluses over the next three fiscal years, fuelled by historically high resource revenue, if resource revenue was at its average of the last two decades, this year’s $4.6 billion projected budget surplus would turn into a $5.8 billion deficit. And projected budget surpluses in 2025/26 and 2026/27 would flip to budget deficits. To be clear, this is not a far-fetched scenario — resource revenue plummeted by nearly 70% in 2015/16.In contrast, if resource revenue fell to its average (again, based on the last two decades) but the Smith government held to its original 2022 spending plan, Alberta would still have a balanced budget in 2026/27.Bottom line; had the Smith government not substantially increased spending over the last two years, Alberta’s spending levels today would align with more stable ongoing levels of revenue, which would put Alberta on more stable fiscal footing in the years to come.Smith has warned Albertans a budget deficit may be on the way. To mitigate the risk of red ink moving forward, the Smith government must show real spending restraint in its 2025 budget. Tegan Hill and Milagros Palacios are economists at the Fraser Institute.
