Borrow-and-spend vs. tax-and-cut: How Alberta and Saskatchewan deal with deficit

Imagine you're in charge of your province's finances, sitting around the cabinet table, staring at a balance sheet that makes you, well, queasy.

Your government depends heavily on resource revenues oil, gas, maybe potash, too and prices are down, across the board. Meanwhile, the economy has been shrinking, and you realize there's no way you're going to balance the budget this year. Or next year.

You think back to your economics class and the Keynesian theory that when times get rough, government needs to borrow and spend to prop things up. But then, you remember the pitfalls of the theory,and the problems past governments have run into when racking up large amounts of debt.

So, what do you do?

This is the story of two governments Alberta's and Saskatchewan's that were confronted by this scenario as they prepared their budgets last year. Yes, there were some differences in the nuances of the economic realities in each province. But they faced a similar dilemma, and they chose very different paths.

While Alberta opted to borrow heavily to make up its shortfall, Saskatchewan cut services and hiked taxes.

One year later, as new budgets are being prepared, Alberta Finance Minister Joe Ceci and former Saskatchewan premier Brad Wall both stand by their past decisions.

But if history is a jury, that jury is still out.

Competing visions

Finance Minister Ceci says his financial plan for Alberta is on track.

"To keep our province going forward without making people suffer in this province, we have to take on debt."

While his heavy borrowing has dragged down Alberta's formerly sterling credit rating, the province can now boast the fastest-growing economy in the nation for 2017. Not all economists would agree, but Ceci draws a direct line between the economic rebound and his government's stimulus spending.

And Alberta maintains for the time being, at least the lowest debt-to-GDP ratio in Canada.

Former Saskatchewan premier Brad Wall, meanwhile, believes his austerity budget, with its long-term vision for Saskatchewan, was, and remains, the right one.

"This interminable deficit budgeting [in Alberta] is very short-sighted," he said.

But when it was rolled out, his government's combination of spending cuts and tax hikes was met with widespread protests and it was forced to backtrack on some parts of the plan.

Still, Saskatchewan is on track to balance its books years sooner than Alberta. And Wall believes this will steer his province clear of the mistakes so many governments made in the 1980s heavy, sustained borrowing which he says led to even more painful budget cuts in the 1990s out of sheer necessity rather than prudent choice.

So, who's right?

That remains an endlessly debated and, as yet, unanswered question in economics. It's a real-world case study in the Keynesian versus classical approach. Entire forests of academic articles have been written on this stuff. But here, now, this is no ivory tower exercise. The decisions our leaders make have real-world consequences that will affect millions of lives. Real people with real hopes and dreams.

So let's take a look at how these disparate approaches to managing the public purse are panning out.

Joe Ceci on 'good' debt

For someone who's borrowing nearly $10 billion this year, Ceci has been smiling a lot lately.

Buoyed by an economy that's finally on the upswing after two long years of recession, Alberta's finance minister believes everything is going according to plan.

Maybe a little better, even.

Alberta's GDP growth should exceed four per cent in 2017, according to numerous forecasts, putting it well ahead of every other province. The economy has also added 32,000 jobs since the budget was introduced, most of them in the private sector. By comparison, Saskatchewan lost 5,000 private-sector employees over that same time, according to Statistics Canada.

"This is all turning out the way we said it would, if we stayed to the program," Ceci said.

Government revenues have been on the rise, too, and the deficit projection is down, slightly. It's now forecast to ring it at $9.1 billion, down from the $10.3 billion estimate when the budget was first introduced.

This required the gamble that borrowing now wouldn't hamstring the future. In the meantime, Albertans get to keep their public services, there were no big cuts to collective contracts, and the budget didn't hike taxes. Not a lot of pain.

The flip side is that Alberta's debt continues to mount.

After declaring itself debt-free just over a decade ago, the province is now projected to owe $71 billion by 2019-20. And the NDP government's budget includes four more years of borrowing after that.

Cue the outcry.

Ceci's critics have been howling about the financial trajectory he has set the province on. The opposition slams him almost daily for "drowning" Alberta in debt. "Orange Is The New Broke" has become a popular slogan among the anti-NDP crowd.

And to the east, in a province on a different path, the former NDP finance minister from Saskatchewan, Janice MacKinnon, has called on Alberta to curb its spending.

But Ceci believes the borrowing is manageable and preferable to the alternative. Slashing government spending or raising taxes now would threaten the still-nascent economic recovery, in his view.

"The other guys are saying cut drastically right now and things will be better. Well, we just have to look next door to Saskatchewan to know that the austerity program they have there has meant that their economy is a laggard in this country," Ceci said.

"We've got the right plan. We've got the right path to balance."

That path is a long one, however.

The government aims to shrink the deficit slowly and return to balance by 2023-24. And, even with the economy improving faster than projected, Ceci sees no reason to shorten that schedule.

"Our plan is working ... so why not stick to the plan that has got our economy back on track?" he said.

But much the same claim is being made one province over.

Brad Wall on the long-term view

As premier of Saskatchewan, Brad Wall oversaw 10 provincial budgets, but none quite like his last.

Faced with a sea of red ink similar to the one washing over Alberta, he chose a different path. Rather than borrowing and facing long-term risks, his government opted for short-term pain. It didn't eliminate the deficit altogether, but it certainly tamed the beast.

The austere financial plan was announced nearly one year after the Saskatchewan Party cruised to electoral victory, winning 51 of 61 seats. Wall's government had a clear mandate, and a lot of political capital to spend. And that gave them some leeway to make moves they believed were necessary but knew would offend many voters.

So, they increased the provincial sales tax to six per cent, up from five. They also expanded the PST to apply to things that were previously exempt, such as children's clothing and restaurant meals.

Meanwhile, a host of cuts were announced to public transit, universities, libraries, social services, municipalities, community organizations and even funeral services for people who die penniless.

"There is some short-term pain, certainly, in the budget," Wall told CBC News during a recent visit to Calgary.

"But it wasn't just about one year."

Still, the past year has been a difficult one, politically.

"Dumpster fire" and "red hod mess" were among the phrases longtime newspaper columnist Murray Mandryk chose to describe the 2017-18 budget. And he's been covering the Saskatchewan legislature since 1983.

Protesters have had some choice words of their own. As soon as the budget dropped, it was met with immediate demonstrations. They kept it up for months. Picketers swarmed cars outside a dinner event hosted by the premier last October and marched outside the Saskatchewan Party's leadership convention in January.

Saskatchewan budget protesters swarm cars outside Premier's Dinner venue in Saskatoon

7 years ago

Duration 1:06

Things got testy during a protest of the contentious Saskatchewan budget on Thursday night in Saskatoon.

Nevertheless, Wall believes history will prove his budget to be the right move.

While the Saskatchewan government has since backed down on some of its cuts, it still says it will balance the books by the 2019-20 fiscal year. That's four years sooner than Alberta.

Wall announced his resignation as premier last summer, admitting some mistakes were made in the budget's rollout. But he still defends the broad strokes of the plan.

The long-term goal, Wall said, is to set a course that steers clear of past mistakes.

Left unchecked, he fears government borrowing could return Saskatchewan to a financial position many provinces (and the federal government) found themselves in decades ago a time of huge deficits.

"In the '80s," Wall said, "it was conservative governments in Alberta and Saskatchewan that said the same thing, informed in part by economic advisors who'd say you could kind of spend your way out of this."

Yet, no matter which way governments choose to tackle a big hole in their budgets, they have to sell it to the electorate.

Spending political capital

Saskatchewan's austerity budget caught people by surprise, said University of Regina political scientist Tom McIntosh.

"There wasn't a lot of groundwork laid," he said.

"There wasn't a lot of the premier on television, wringing his hands, saying this is going to be a tough budget. And so people were taken aback by how broad the cuts were and how broad the tax increases were."

Without that buy-in from the public, Saskatchewan has been forced to abandon many key elements of its fiscal plan perhaps most significantly its pledge to reduce public-sector salaries by 3.5 per cent.

By contrast, the Alberta government sold a different story.

That story included deficit spending, but also an agreement with the province's teachers, nurses and paramedics that, rather than cuts, included no salary increases for the next two years. Ceci believes this positions Alberta for a smoother, more predictable transition back to balanced budgets.

'Reasonable people will disagree'

And soon, we'll get a better idea of where these divergent paths through the fiscal woods are leading each province.

In both Edmonton and Regina, cabinet ministers have again been sitting around those big tables, making tough decisions as they prepare their budgets for 2018-19. Alberta's will be released on March 22, while Saskatchewan's is due in early April.

These documents will give us another glimpse of how each fiscal plan is faring. The long-term results, of course, won't be known for years. And, even then, there's unlikely to be a clear "winner" in the borrow-and-spend versus tax-and-cut debate, says University of Calgary economist TrevorTombe.

"One cannot say that one is objectively better than the other," he said. "Reasonable people will disagree over whether Alberta's approach is superior to Sasktachewan's."

At the end of the day, Tombebelieves budget decisions especially at a provincial, rather than national, level come down to more subjective questions of what people care most about.

"This is not about macro-economic implications," Tombe said."It's more about how we value the spending items or the tax policy or how concerned we are about debt levels and interest burdens."

Still, these recent experiences in Saskatchewan and Alberta will no doubt be studied and compared, both now and into the future, providing plenty of fodder for the next generation of politicians and voters.

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