Governments are taking advantage of revenue increases—in part due to high inflation—to send households money to mitigate rapidly rising prices. In doing so, a primary concern is to avoid blunting the Bank of Canada’s efforts to cool inflation and encourage government spending restraint. But Alberta’s massive budget surplus comes with its own particular considerations.
Alberta’s budget surplus of over $13 billion this year translates to nearly $3,000 for each Albertan, says University of Calgary economics professor Trevor Tombe.
But while he says the province’s ambitious measures to provide inflation-fighting aid to residents aren’t likely to spur inflation, the surplus should be viewed in the context of oil price volatility.
“Historically, when Alberta has the kind of flush resource revenues that it has right now, it does tend to ratchet up the size of program spending, permanent operational spending.
“And that might be sustainable while oil prices are above a certain level. But it exposes the province to risk in the future because then when oil prices fall, you’re left with this larger government than you would have otherwise have had,” he told The Epoch Times.
Alberta’s mid-year fiscal update assumption for the price of West Texas Intermediate (WTI) for 2022–23 is US$91.50 per barrel. WTI is trading around US$80.
Tombe cautions that Alberta’s surplus should be viewed differently from other provincial surpluses since it didn’t come about through rising income levels but from resource revenues, where the government sells an asset it owns.
“It’s like you’re selling furniture in order to fund operations. And that’s itself not a sustainable position to be in, so we, as a province, have really missed a huge opportunity to save that resource revenue. And I fear we are going to miss this opportunity again.”
‘More Than Any Other Government’
Alberta’s affordability measures have been clearly communicated as being temporary, but they’re also described as both targeted and broad-based.
Both Alberta Premier Danielle Smith and Finance Minister Travis Toews said helping affordability will be balanced with the need for fiscal responsibility and not exacerbating inflationary pressures.
Tombe says that about 55 percent of Albertans will receive the targeted benefit of $600 for seniors and certain families, but 98 percent of households are likely to benefit from the fuel tax suspension and the utility bill rebates for electricity and natural gas.
“So Alberta is far away doing more than any other government in Canada. And that’s obviously because we have an election coming up, for one, and two, just the massive resource revenues make it very easy for the provincial government to do that,” Tombe said.
He explained that the total of Alberta’s affordability measures is going to be equivalent to about 1 percent of the province’s gross domestic product (GDP), and that if the feds were to provide measures of similar magnitude, Ottawa’s total cost would be $26 billion.
‘Substantial Package’
At a time when most governments are dealing with deficits, “Alberta has quickly moved back to the front of the fiscal pack in Canada,” says BMO senior economist Robert Kavcic in a Nov. 24 note.
While details of Alberta’s Inflation Relief Act are still being finalized, Smith on Nov. 23 outlined the measures that the province is putting forth, worth $2.8 billion over the next three years.
Toews, in presenting the province’s mid-year fiscal update on Nov. 24, said that “this is a very substantial package and every Albertan will benefit from this package.”
But one of the reasons Tombe says the affordability measures won’t stoke inflation is that most products purchased are made elsewhere and priced on a market outside the province.
“The additional demand that may result from the cash transfers wouldn’t really change the price of those other items. And I think the most obvious one is energy prices. It doesn’t matter what Alberta does in terms of cash transfers, global oil prices are going to do what they’re going to do,” he said.
“The Canadian federal government, if it were to do something of similar magnitude, that would have a bigger effect on demand and therefore raise potentially larger concerns that it would add to price pressures.”
‘Fiscal Restraint’ Preached
Bank of Canada Governor Tiff Macklem told parliamentarians on Nov. 23 that temporary measures targeting the most vulnerable will fuel inflation less than broad-based measures.
The International Monetary Fund (IMF) in a Nov 21 blog post had also noted that “where inflation is high and persistent, across-the-board fiscal support is not warranted.” It says governments should prioritize helping those most in need while avoiding boosting demand and consequently inflation.
It adds that less government spending cools aggregate demand and inflation, thereby not requiring the central bank to raise rates as much.
“In most countries, higher inflation strengthens the case for fiscal restraint,” according to the IMF.
“Fiscal restraint will reduce the cost of bringing inflation back to target in a timely way, compared with the alternative of leaving monetary policy alone to act.”
The IMF said governments can improve their fiscal position by moving away from broad-based support to assisting the most vulnerable through “targeted cash transfers.”
The feds’ Fall Economic Statement, presented on Nov. 3, outlined $11 billion over five years to make life more affordable, with the biggest line item being nearly $2.5 billion for doubling the GST credit for six months—very much a targeted measure.
The books at the federal level also look much better now given that elevated inflation boosted government revenue through higher tax collections. It also reduced the value of the national debt outstanding.
However, Parliamentary Budget Officer Yves Giroux told parliamentarians on Nov. 28 that the feds’ spending of $52.2 billion out of the $81.2 billion in new fiscal room since Budget 2022 is not an example of fiscal restraint.
