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Opinion: Alberta needs to bring back Ralph Klein's fiscal rules

The province keeps spending, borrowing and accumulating debt it has to pay interest on. Its current fiscal rules clearly aren't working

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Alberta’s recent budget demonstrated the complete inability of the Smith government’s legislated fiscal framework — the Sustainable Fiscal Planning and Reporting Act, which it passed in spring 2023 — to prevent nearly $24 billion in accumulated budget deficits over the next three years or the ballooning of the province’s debt to over $137 billion by 2029.

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Credit-rating agencies’ responses to the budget were ominous. Moody’s said the “combination of large deficits, rising debt and a weaker outlook for oil prices is credit negative,” while DBRS judged that “… rising debt further limits the government’s ability to respond to an unexpected economic slowdown within the current credit ratings.” The government’s current fiscal rules clearly haven’t done the job they’re meant to do. The current spike in oil prices will provide short-term fiscal relief but this is a structural problem that needs to be addressed now.

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The legislated fiscal framework the Smith government brought in with such fanfare just before the 2023 provincial election was supposed to maintain fiscal discipline, but has instead perpetuated the government’s over-reliance on oil and gas revenues to support runaway spending habits. The government exploited loopholes in its fiscal framework, which only requires balancing the budget once an actual deficit is reported in the 2025-26 year-end financial statements, which aren’t due until June.

The government does finally appear to have made a grudging decision to review its fiscal rules, but there is a danger it will simply use it as an excuse to build more loopholes and exceptions into an already broken framework. The government should instead appoint a blue-ribbon panel and ask it for a report within 90 days.

The best way for the government to demonstrate a serious commitment to dealing with the deteriorating fiscal situation would be by replacing the current fiscal framework with one based on the fiscal rules the Ralph Klein government used to cut spending, balance the budget and eventually eliminate the province’s debt.

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The fiscal frameworks of the mid- to late-1990s included the Deficit Elimination Act, the Balanced Budget and Debt Retirement Act and the Fiscal Responsibility Act. They worked because they encouraged fiscal discipline through clear and understandable rules: restricting the amount of oil and gas revenues that could be used to support current spending plans; setting clear targets on the path to reach balanced budgets; then, after returning to budget balance, not permitting deficits; and, finally, setting a legislated debt-elimination schedule. Klein’s rules did include very limited exceptions for emergencies and disasters, but only when deemed to be urgently required. This approach was instrumental in balancing the budget in 1995 and paying off the province’s accumulated debt by 2004.

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Unfortunately, this easy-to-understand, disciplined approach to fiscal planning is not a feature of the Smith government’s current fiscal framework, which instead involves loopholes and exceptions that permit forecast budget deficits, actual year-end deficits and significant increases in operating spending. These all contribute to overwhelming dependence on oil and gas revenues to support ever rising current spending — which means that during difficult fiscal periods the Alberta government has virtually no obligation to balance the budget, pay down the debt or make any direct deposits of oil and gas revenues (other than investment income) into the Heritage Fund.

The Smith government’s legislated fiscal rules continue the approach of the NDP’s Fiscal Planning and Transparency Act (FPTA), which was: hope for a sustained rebound in oil prices and oil and gas revenues to fulfill lavish spending increases. This fiscal patch job worked when oil and gas revenues were high, as they were in the first two full fiscal years of the Smith government, but when oil prices fell it failed to deal with Alberta’s structural deficits and runaway spending patterns, the latest provincial budget being the best example of that.

The Smith government needs to get back to budget basics and, like Ralph Klein, bring in a clear and simple fiscal framework that Albertans can understand and that actually requires fiscal discipline and responsibility.

Lennie Kaplan is a former senior manager in the fiscal and economic policy division of Alberta’s Ministry of Treasury Board and Finance.

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