Back to the Future

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The following is a summary of Professor Tom Flanagan’s comments at the First Annual Alberta Economic Summit convened by Alison Redford, the premier of Alberta, and held at Mount Royal University on February 9, 2013.

Premier Redford has called this meeting because the province of Alberta is faced with a deficit for fiscal 2012-14 reported to be in the range of $6 billion.  That is a large amount for a budget of about $40 billion, and a problem that certainly needs to be dealt with.

Twenty years ago, Premier Ralph Klein had to face a similar problem.  Oil prices were low, and the government had run six consecutive deficits under Premier Don Getty.  In fact, the situation was even worse than it is now, because the province had been borrowing money and was now in a situation of net debt, i.e., the amount borrowed was larger than the assets in the Heritage Fund.  Alberta has indeed started to borrow again, but the amount of debt thus far accumulated is much smaller than it was in 1993.

Premier Klein and his Treasurer Jim Dinning—two great Progressive Conservatives—moved quickly to tackle their problem.  Knowing that they had no way to increase resource revenues in the short run, they made substantial reductions in the budget, including a 5% wage cut in the entire public sector.  Within a few years they had balanced the budget, after which they went on to repay all debt.

There was some short-term pain, but the fiscal conservatism of Klein and Dinning laid the groundwork for an unparalleled run of prosperous years in Alberta.  Even after the Great Recession of 2008, Alberta still enjoys the highest standard of living in Canada, and indeed in all of North America.

The Klein-Dinning approach to deficit reduction is still valid and should be applied to our contemporary problems.  Here are the key elements:

  1.  There have to be actual cuts in expenditures.  Just holding expenditures constant is not nearly enough to cope with our accumulated discrepancy between revenue and expenditures.

  2. Politicians and senior civil servants have to lead by example.  They have to absorb cuts at least as large as those imposed on other civil servants and on the public at large.

  3. The budget has to be cut across the board, including the broader public sector, such as teachers, nurses, police, municipalities, etc.  Everyone has to share the pain.  No group should feel that it has been singled out for exploitation.

  4. The program of cuts has to be fast, taking place within three years.  The government has to move against the special-interest groups before they can organize to resist.

  5. A longer-term plan is bound to fail because too many unforeseen contingencies, such as an increase in interest rates or a further decline in oil prices, are bound to arise.  The government has to move quickly in order to succeed.

Tom Flanagan, PhD, FRCS, is senior professor of political science at the University of Calgary. He comments regularly for the Globe and Mail and CBC.