Opinion: Funding Alberta’s long-promised tax cut through budget deficits unacceptable

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Premier Danielle Smith is now suggesting that giving Albertans a tax cut — as promised by the UCP during the 2023 election — could require running a budget deficit in 2025-26. This follows warnings last fall from Treasury Board and Finance officials that the government could be facing a deficit next year due to lower-than-forecast crude oil prices, coupled with spending growth pressures in areas such as health care, education and infrastructure.

The recurrence of this talk about budget deficits should come as no great surprise as provincial finances continue to be heavily exposed to the price of crude oil on world markets. In September 2024, I wrote that incorporating a moderation in crude oil prices (Which I now project at $70 U.S. per barrel), Alberta’s estimated budget deficit would be $1.1 billion in 2025-26. And this does not include the $1.4-billion tax cut, which Smith promised last summer was coming in the upcoming fiscal year. Assuming the full tax cut was included in Budget 2025, the projected budget deficit in 2025-26 would rise to $2.5 billion.

Despite a perception — aided and abetted by the government — that Alberta’s fiscal rules are rigorous, fiscally responsible and designed to prevent budget deficits, this is not the case. Alberta’s fiscal rules allow budget deficits when total (2025-26) budgeted revenues decline by $1 billion or more from the previous year’s (2024-25) third-quarter revenue forecast. This loophole is generous. For example, if total budgeted revenues in 2025-26 fell by $1.5 billion from the previous year’s (2024-25) Q3 total revenues, the projected deficit permitted under Alberta’s fiscal rules could be $1.1 billion in 2025-26.

Implementing the $1.4-billion tax cut using these fiscal framework loopholes to run deficits is simply unacceptable and no substitute for a long-term strategic fiscal planning framework that emphasizes getting off the energy roller-coaster by reining in wasteful spending. This means weaning the government off non-renewable resource revenue (NRR) by gradually withdrawing its ability to use any NRR for current spending purposes. This can be done through permanent multibillion-dollar adjustments to Alberta’s high spending base through a rigorous program and service transformation process to create the space to permanently fund the promised tax cut.

In this vein, the Alberta government should encourage and build systems and processes that encourage innovation, good ideas, and better program and service outcomes. I urge the Alberta government to adopt a rigorous program and service transformation framework to guide the permanent spending adjustments needed to get off the energy price roller-coaster and ensure the successful implementation of the $1.4-billion tax cut, all while building a Heritage Savings Trust Fund valued at $250 billion to $400 billion by 2050.

As well, in the interests of fiscal transparency and accountability, and to inform the effect of the tax cut, the government should have provided Albertans, through a multi-year fiscal and economic update, with information on the consequences of a moderation in crude oil prices on the province’s finances and balance sheet over the next two fiscal years (2025-26 and 2026-27).

However, this did not happen, as changes to Alberta’s fiscal framework legislation brought forward during the 2024 spring legislative session eliminated the requirement for presenting a multi-year fiscal and economic update to Albertans by the end of November.

The requirement for a legislated, full mid-year fiscal and economic update needs to be restored as soon as possible.

Lennie Kaplan is a former senior manager in the fiscal and economic policy division of Alberta’s Ministry of Treasury Board and Finance, where, among other duties, he examined best practices in fiscal planning. He served as executive director of the MacKinnon Report on Alberta’s Finances in 2019.