The Prairie Provinces’ Growing Debt: The Danger of Unsustainability

Commentary, Economy, Alexandre Massaux

At the end of 2020, Alberta’s debt was estimated to be $98 billion, Manitoba’s was $28.6 billion and Saskatchewan’s stood at $15 billion. These debts are lower than Quebec’s ($220 billion) and Ontario’s ($448.9 billion), but concerns arise about their sustainability. Indeed, they are a long-term burden for the government, the taxpayers and the economy. Moreover, debt growth is not a new issue and didn’t just arise with the COVID-19 crisis, although the pandemic has increased public spending and deficits. Past examples in Europe show what Canada and the provinces must avoid and how they can do it.

Persistent Government Deficits Will Not Reduce the Debt  

Government deficits have created growing debt. When the provinces and the federal government spend more than they take in, they have to borrow money to balance their budgets. A persistent government deficit will increase the debt more and more. Unfortunately, this is the case for the Prairie Provinces. Successive Alberta governments have run nearly uninterrupted deficits since 2008/09. For 2017-18, the debt was $8 billion. It was $6 billion in 2018-2019,  $12 billion in 2019-20 and $20.2 billion for 2020-2021. Manitoba has had the same problem in recent years (deficits of $521 million in 2018/19 and $360 million in 2019/20) and so has Saskatchewan (a deficit of $365 million in 2018/19 and a surplus of $34 million in 2019/20 dropping to $2,426 million for 2020/21). The deficits through the years have weakened the provinces’ financial situations. Of course, even with a well-managed and balanced budget, there would have been massive expenses caused by the COVID-19 crisis, but the debt would be lower. Moreover, there is a risk that the current turmoil will weaken budgetary discipline, leading the provinces and federal government into long-term spending. All these trends will lead to an increased debt burden on taxpayers.

The Shadow of the Greek Crisis 

Many politicians and commentators say that public debt is not a problem and that governments can always pay their debtors. However, that is not always true: Greece’s case shows what happens when a state does not control its public finances and loses its debtors’ trust. In 2009, Greece’s public deficit became so critical that lenders refused to buy Greek government bonds. Consequently, the interest rate for these bonds rose from five per cent to 35 per cent due to the high risk of default. This situation led Greece to bankruptcy but also to greater control by foreign countries and institutions. Since private lenders had become reluctant to accrue any Greek debt, the European Commission, the European Central Bank and the International Monetary Fund (also called the Troika) provided bailouts to Greece.

Moreover, Germany and its bankers become Athens’ most prominent lenders. This financial crisis created a loss of sovereignty for Greece and worsened the country’s economic situation. The government failed to wisely manage its finances, which led to the impoverishment of the population, who had to make substantial efforts to improve the financial situation. Indeed, the Troika and the German debtors haven’t given out free money (Milton Friedman liked to quote 19th-century philanthropist John Ruskin by saying: “There is no free lunch.”) and asked for economic reforms. The Greek situation shows that an ineptly managed budget and debt will end up costing the taxpayer and the population for years. The Greek crisis has improved since, but remains fragile.

Rising Debt is Not Fatal

Increasing debt is not inevitable, but the problem must be dealt with quickly before it is too late. In Europe, some countries have succeeded in reducing their debts in  past years. Indeed, Denmark reduced its debt from 117 billion euros in 2014 to 104 billion euros in 2019. Similarly, Germany and the Netherlands have reduced their debts from 2,213 and 455 billion euros to 2,057 and 394 billion euros, respectively. Budgetary discipline has led to an improvement in their financial health. Germany, Denmark and the Netherlands have a surplus, which helps them reduce their debts.  

It would be helpful for the Prairie Provinces to look at debt management in Europe, both the good and the bad cases. Canadian citizens must not be the losers in a situation of endless,  rising debt.

 

Alexandre Massaux is a research associate with the Frontier Centre for Public Policy.

Photo by Elliott Matthews on Unsplash.