By Ben Eisen
and Jason Clemens
The Fraser Institute
VANCOUVER, B.C. Mar. 23, 2017/ Troy Media/ – The Alberta government will run another budget deficit this year – the ninth deficit in 10 years – and it’s important to recognize that the province has been here before.
After running steep deficits for much of the mid-1980s to the early 1990s, the province’s finances were in shambles. Fortunately, legislators recognized the severity of the problems, and were able to tackle the province’s budgetary issues, helping to unleash substantial economic growth.
Our current legislators would be wise to recall the lessons of that era.
In the early 1990s, Canada’s federal and provincial governments (including Alberta’s) faced significant budget deficits as well as high taxes. Back then, similar debates roiled about whether spending reductions or tax hikes were the best way to slay the deficits, driven by free-spending governments in the 1970s, 1980s and early 1990s.
These problems persisted for many years until finally, in the early 1990s, an implicit cross-partisan agreement began to emerge around the need for disciplined spending, balanced budgets, competitive taxes and smaller, smarter government. We refer to this understanding as the Chretien Consensus, so named because its policies were embodied by the Liberal federal government of the day under Prime Minister Jean Chretien.
And the process of forming the Chretien Consensus began very close to home – next door, in Saskatchewan. The first serious deficit elimination effort actually came from Roy Romanow’s NDP government in Regina, which reduced spending by 14.4 per cent between 1991/92 and 1996/97, allowing for tax reduction and reform, improved provincial competitiveness.
The success of the Romanow reforms helped set the stage for reforms in Alberta. Then-Finance Minister Jim Dinning tackled Alberta’s large budget deficit entirely through spending reductions. And those reductions were substantial. Over three budgets, provincial program spending was reduced 21.6 per cent. As a result, the government eliminated its deficit in just two years.
These balanced budgets and lower debt created a virtuous cycle. Interest costs decreased, both because debt was declining and because bond ratings were improving, and the increased fiscal room from lower interest costs meant some spending could be increased and taxes reformed and reduced. Key amongst these reforms were the introduction of the country’s only single-rate personal income tax and marked reductions in business taxes.
The improved fiscal outlook and more competitive tax regime helped spur strong economic growth in the province. While Alberta enjoyed a $10,543 advantage in per capita GDP (the average income per person) over other provinces in 1993, that spiked to $36,009 by 2006. Economic growth in Alberta was so strong that by one estimate the national unemployment rate would have been 2.2 percentage points higher in 2014 without Alberta’s job-creation. Alberta’s economic boom didn’t just make Alberta more prosperous; it made Canada more prosperous.
The fact that the NDP Romanow government, the federal Liberal Chretien government, and the Progressive Conservatives under Ralph Klein in Alberta all prioritized deficit reduction and enacted sharp spending cuts to slay large deficits speaks to the fact that during the early 1990s a broad, national, cross-party consensus on fiscal prudence was taking hold in Canada.
Unfortunately, the Chretien Consensus seems to have fallen out of favour with Alberta legislators—again, the province will likely run its ninth deficit in 10 years—but our political leadership is increasing spending briskly and has no plans to balance the budget until sometime next decade. Meanwhile, it’s undermining the province’s economic competitiveness by raising taxes on a struggling economy.
The NDP’s approach today is reminiscent of the failed deficit-reduction strategies of Alberta governments throughout the 1970s and 1980s. It’s unlikely to produce different results. By learning the lessons of history and considering the lessons of the Chretien Consensus, our political leadership can find a blueprint for quickly eliminating the deficit, promoting tax competitiveness, and helping restore Alberta as an economic powerhouse in Canada.
Ben Eisen, Steve Lafleur and Jason Clemens are analysts at the Fraser Institute, which recently published the book End of the Chretien Consensus?
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