Prairie provinces must put an end to rising debt

Prairie provinces must put an end to rising debt
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The current turmoil could weaken budgetary discipline, leading governments into long-term spending and increased debt

At the end of 2020, Alberta’s debt was estimated at $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 there are concerns about their sustainability.

Indeed, they’re a long-term burden for the governments, the taxpayers and the economy.

Debt growth isn’t 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 won’t 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 well-managed and balanced budgets, there would have been massive expenses caused by the COVID-19 crisis, but the debt would be lower. Moreover, there’s 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 public debt isn’t a problem and that governments can always pay their debtors.

That’s not always true: Greece’s case shows what happens when a state doesn’t 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, and 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.

Germany and its bankers became 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.

The Troika and the German debtors haven’t given out free money (economist Milton Friedman liked to quote 19th-century philanthropist John Ruskin by saying: “There is no free lunch”) or 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 crisis has improved since but the situation remains fragile.

Rising debt isn’t fatal

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

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

By Alexandre Massaux
Research Associate
Frontier Centre for Public Policy

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

Courtesy of Troy Media.

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