Not Your Mother's Budget Surplus

03/12/2014 04:06 EDT | Updated 05/12/2014 05:59 EDT

When apologists for the provincial government's new borrowing binge defend it on the grounds that private sector companies borrow money for capital expenses--so why not have the Alberta government do the same?-- their defence invariably contains a significant and faulty assumption: that political behaviour is the same as that of private companies.

The recent Alberta budget, for those who don't read dry documents, forecasts a $2.6 billion surplus in the budget year that begins April 1. However, at the same time, Alberta will also sink deeper into debt. The increased debt is occurring despite total revenues increasing by more than $6-billion than anticipated this time last year.

For the record, the "surplus" announced in Budget 2014 is not your mother's, or Ralph Klein's, budget surplus. Back then, the surplus was calculated by subtracting the money going out from the money coming in.

Instead, as with the last budget, Budget 2014 hives off operating spending from other spending, such as capital; when the present government talks about a budget surplus, the reference is only to operational spending and not to all the cash flowing into and then out of the provincial treasury.

Anyway, defenders of the descent into debt point to the private sector and note how there, companies regularly borrow for capital spending. Thus, the argument goes, there is nothing unusual or indefensible about the Alberta government doing the same thing.

The accounting is sound enough. But two key differences (at least) exist between the private sector and government: the existence of vote-seeking politicians and the reality of intergenerational buck-passing.

There is also a difference in consequences. When a private sector company incurs debt, the only people on the hook are a company's shareholders and those who lent the money; both have an incentive to restrain annual operating costs and to limit debt, this with an eye to prudence. With government debt, the amounts owing can be paid back by future generations. There are thus few checks on spending or borrowing today.

Of course, the excuse is that future generations will use some of the "stuff" governments build now--highways, schools and hospitals.

Indeed, except that every generation requires infrastructure. So it still makes sense to avoid as much debt as possible given that citizens will always be paying taxes. The only question is how much of their tax will be diverted to interest payments.

To pay for infrastructure and avoid more debt, politicians could raise taxes. But Alberta's prosperity is built in part on moderate taxation vis-à-vis other provinces. Also, Alberta in 2014 is not Alberta in 1905; taxes rose over the twentieth century almost without respite. Some tax reductions occurred in the late 1990s and early 2000s but Albertans are not undertaxed with a view to history.

Beyond higher taxes or more debt, there has always been another option: prudent spending. However, that is something the Alberta government has been less than adept at in some years. For instance, had the province increased program spending after 2005/06 and to 2012/2013 but only in line with inflation and population growth, it would have spent $22 billion less compared to what it actually sent out the door.

This road not travelled is why the notion Alberta must borrow for infrastructure (or at least, borrow as much as it has) completely ignores the spending side of the provincial budget. Had the province not sent per capita program spending to 1980s-era levels over the past decade, it could have redirected some of that $22-billion to needed infrastructure; it could have borrowed less for infrastructure.

The result of past choices is a looming debt explosion and one revealed in Budget 2014 in any number of ways: the province's net financial assets will drop to $3.9 billion by 2016/17 down from $12.1 billion in 2012/13. Or look at total liabilities, forecast to surge to $57.1 billion in 2016/17 up from $36.2 billion last year. (In response, the Alberta government notes its capital assets will grow during this period, but the calculation is irrelevant; it's not as if MLAs will ever sell off hospitals and schools.)

One can also see the cost of growing debt in general and capital borrowing costs, forecast to jump to almost $1.4 billion in 2016/17 from half a billion dollars last year. Or put differently, in two years' time, Alberta's government will spend more on debt interest than on the department of Justice and Solicitor General.

Finance Minister Doug Horner has claimed those who remind Albertans of these realities about the cost of debt are being ideological. Not so; we are merely paying attention to mathematical realities.