Sources of Debt Accumulation in Resource-Dependent Provinces

  • Ronald D. Kneebone University of Calgary

Abstract

Governments in provinces relying on natural resource commodities for significant amounts of revenue face the distinct challenge of unpredictably fluctuating budget circumstances. As politicians routinely point out, much of that challenge is in the volatility of global commodity prices. But a big part of it is actually the policies of the governments themselves. In fact, when effects of commodity prices, economic cycles and fiscal policy are separated from one another, one of the biggest impacts on government debt over the last 30 years in Canada’s four resource-dependent provinces — Alberta, Saskatchewan, British Columbia and Newfoundland and Labrador — has been government policy. While years of booming economies have offset years of busts, virtually all the debt racked up by these provinces over more than three decades has been a combination of movements in commodity prices and political decisions. In Alberta, over three periods since the early 1980s, totalling more than 15 years cumulatively, it was policy — not energy prices or economic factors — that had the biggest impact on government debt levels. From 1988–89 to 1993–94, Progressive Conservative policies were the biggest factor in raising Alberta’s debt, and from 1995–96 to 1999–2000, the Klein government’s policies were the biggest factor in reducing Alberta’s debt. The policies of then premier Ralph Klein also played the biggest role in reducing debt from 2001–02 to 2003–04, while from 2006–07 to 2013–14, the policies of the Stelmach and Redford governments outweighed economic and commodity-price effects in ways that both reduced debt at times, and then raised it again. Over the entire period from 1982–84 to 2013–14, PC government policy increased Alberta’s debt ratio by 9.5 percentage points of GDP, while the business cycle decreased it by only one percentage point, and the commodity-price cycle decreased it by only 1.9 points. In Saskatchewan, the policy component raised the provincial debt ratio by 11.6 percentage points of provincial GDP from 1982–84 to 2013–14. The business cycle added 1.5 points and the commodity-price cycle decreased the debt ratio by 6.1 points. Ironically, given assumptions about party proclivities, it was Progressive Conservative government policies that added most of that debt, and NDP government policies that made the most progress in reducing it. In Newfoundland and Labrador, where a reliance on resource revenue is a more recent phenomenon, the policies of both PC and Liberal governments were almost indistinguishable, together reducing the debt ratio by 9.8 percentage points of GDP from 1982–84 to 2013–14, while the effect of commodity prices reduced it by 16.9 percentage points. But in B.C., government policy was, as in the other western provinces, the biggest factor on the debt ratio: decreasing it by 12.5 percentage points of GDP, compared to the increase of two points caused by economic cycles, and the reduction of 4.9 percentage points caused by commodity prices. Whatever the politicians in resource-dependent provinces say about their unpredictable budgeting challenges, clearly policy can have the biggest impact on debt accumulation. As it happens, that is also the one factor over which those politicians actually have total control.

Published
2015-05-14
Section
Research Papers