Should Alberta Default On Its Debt?

December 1st, 2018  | J. Hodgson
alberta default

In 2004, Ralph Klein declared Alberta debt free. Next year Alberta will surpass $70 billion in debt… the highest ever recorded.

Where did it all go wrong?

1.       Ralph Klein steps down in 2006.

2.       Due to an accident of democracy, Ed Stelmach goes from third to first place during a leadership contest and becomes the premier nobody really wants.

3.       Stelmach’s horrible leadership along with a front bench of resentful hicks and professional progressives leads Alberta back into deficit.

4.       Rise of the Wildrose Party as real conservatives realize the PC party is done.

5.       Stelmach steps down.

6.       Due to an accident of democracy, Alison Redford goes from third to first place during a leadership contest and becomes Alberta’s “first NDP premier”.

7.       More progressive deficits.

8.       2014 – oil prices crash

9.       Due to an accident of democracy, Alberta elects the NDP to power.

10.   2015 Justin Trudeau and Gerald Butts lead the anti-oil and gas Liberal party to national power.

11.   Alberta spends four years getting economically crushed as a result of all this.

12.   Provincial debt explodes.

Next year, it's all but certain that Jason Kenney and the United Conservative Party will be elected, and Alberta can begin the decade long process of restoring sanity and order to our political landscape. The one big focal point that is already being harped on is the provincial debt.

As Kenney wrote in the Calgary Sun:

This year, Alberta will spend nearly $2 billion in debt interest payments, more than the budget of 19 of the 23 provincial government departments. By 2023, debt payments will nearly double to $3.7 billion.

The NDP claims that their high spending is “compassionate” and avoids “deep cuts”. The reality is that their overspending means that a growing share of our tax dollars will enrich bankers and bond holders, rather than funding public services, a lesson that Canadian governments from left to right, had learned through bitter experience in the 1990s.

I too remember the 90’s. I remember the crushing amounts of debt which forced the hand of governments across the nation to slash and burn. I remember the bloodbath budget of 1995 when Paul Martin had his hand forced by bankers to slash and burn the federal government. While the rest of the world was booming and racing toward the 21st century… Canada was penny pinching and stuck in malaise. The 90’s were a lost opportunity and it was our fiscal situation that was to blame.

Leftists claimed the pain was due to the choices of “hard right-wing, fiscally conservative” governments during that time, but the facts don’t bear that out. Saskatchewan’s NDP government, led by Roy Romanow, was the first and arguably the worst when it came to deficit slaying tactics. He had no choice… the bond holders were in charge.

Fiscal conservatives blamed the largesse of the proceeding two decades for the situation. If big spending governments had more discipline with the bottom line, then we wouldn’t have been in that situation to begin with. This is true, but when does fiscal discipline ever sell in a democracy? You can be a fiscal conservative and warm the opposition benches with your principles or you can promise to give people what they want and win power. Democracy has functioned like this since forever, much to the chagrin of fiscal conservatives.

Where do we go from here?

It took Ralph Klein 11 years to pay off a $23 billion debt, and this was done during a time when natural gas and oil prices exploded ever higher. It was also done during an era when Alberta was viewed as a safe place to invest, before Stelmach’s royalty review and the ascendancy of the NDP. Jason Kenney is going to be facing a $70 billion debt and a province that has now been permanently scarred by the NDP. We’re looking at generations of austerity in order to get back to where we were in 2004. Kenney will use the existence of the debt to restrain spending, but really… that’s not unlike what Ralph Klein did and all that happened was that we ended up here.

What should be done instead?

Alberta should default on the debt

I know this is contrary to Canada’s White Anglo-Saxon Protestant sensibilities, but if fiscal conservatives want to entrench fiscal conservatism beyond government whims, then this is a perfect way to do it… and it has been done before.

“We have no other alternative. The government is broke.” – William Aberhart upon defaulting on Alberta’s debt in 1935

William Aberhart was the Premier of Alberta from 1935 to 1943. It was the height of the Great Depression and Alberta’s meagre by today’s standards debt proved to be too much for the province. Alberta defaulted on the bond holders. Ten years later Ernest Manning met with bond holders and provided them a take it or leave it offer, severely reducing the payback obligated. Manning governed the province until 1968 and over his 25-year reign he left a fiscally conservative gold standard of balanced budgets and moderate spending behind him.

The key learning lesson here is that defaulting on the provincial debt didn’t ruin the province. It simply handcuffed the provincial government to policies of fiscal conservatism. Without the ability to borrow…they didn’t. We should do the same today.

Here’s some likely objections…

1. What about in cases of emergencies? What if we really, really need to run deficits?

Firstly, not having the ability to borrow would incentivize a “rainy day” savings account. The government would have to set aside a bit of money every year for emergencies that might require extra spending such as a forest fire or flood or severe national recession. If something like that happens then you dip into savings, not credit lines.

Secondly, proper government should be making and prioritizing those sorts of emergencies anyway. That’s the point of government… to provide safety and security for the people. This shouldn’t require unforeseen spending. It should be a normal part of budgeting.

Thirdly, anything beyond a flood or fire would likely be the responsibility of the federal government at that point. If the Russians decide to invade us, then not having the ability to run provincial deficits isn’t our top problem.

2. It will create investment uncertainty and drive away business investment.

Businesses want investment certainty regarding regulation and cooperation from the provincial government. Money lenders wouldn’t lend to our provincial government and we’d have to live within our means as a result. The economy itself would carry on just fine.

3. The federal government would view this as a blow to our national credibility.

Who cares what the federal government thinks? They're our enemies. Making them upset is a bonus.

Fiscal conservatives bang their heads against the wall year after year, decade after decade. The same ideology revolves, ”If only people will elect governments that are fiscally conservative, then we won’t have so much debt and that money can be used for good things like hospitals and tax cuts!”

It never works and democracy is the fault.

Defaulting on the debt, not only wipes the slate clean, but it will ruin our credit rating and prevent future borrowing from leftist governments. It will effectively entrench fiscal conservatism for a generation regardless of how people vote. We shouldn’t be saddled with almost 100 billion dollars of debt just because the NDP accidently won power in a protest election. Jason Kenney has referred to the NDP as an accidental government… let’s not burden taxpayers with a lifetime of austerity in order to correct that moment of bad judgement.

Let’s default on the debt and begin anew with a policy and culture of fiscal conservatism inoculated from democracy, that permeates throughout the province for a generation. Let us default on the debt.