Alberta has long been a driving force for this country’s economy. While Quebec stagnated and Ontario slowed down, Alberta acted as the locomotive of the Canadian economic train. Given its current slowdown, there is cause for concern.
Indeed, projections that Alberta’s economy is set to shrink for the foreseeable future will hurt the Canadian economy as a whole. Yet one thing needs to be made clear: that province’s current challenges are partly the result of policy decisions that moved it away from its proven recipe for success.
Since the Second World War, Alberta has consistently been richer than the rest of Canada. Up to 1975, the average Albertan was 4% richer than the average Canadian. Since 1975, that margin has grown progressively regardless of what was happening on the world market for oil, rising as high as 25%, or roughly $6,500 per person.
True, factors foreign to the province could hurt its economy. However, the government’s economic policies tended to allow considerable room for entrepreneurs to act, it avoided needless intervention in the economy, and it kept taxes relatively low. As a result, measures of economic freedom in Alberta has shown steady improvement since the 1980s.
In such an unrestrictive environment, it is not surprising that there was rapid economic growth—regardless of the amount of oil exploitation that was going on. In essence, the oft-praised “Alberta Advantage,” which made many other provinces envious, was the result of sound economic policy.
In recent years, though, the province has moved away from the practices that worked for so many years. Long the backbone of its advantage, its public finances have deteriorated rapidly. In the mid-2000s, before the recession affected public revenues from the oil sector, public spending began to increase steadily. The government started running deficits, doing so in seven of the last eight budgets as spending outpaced demographic and economic growth.
And it ran deficits in spite of the fact that taxes increased. Had it limited real spending growth to the rate at which the population grew, it would be spending $10.3 billion less today, and running a budget surplus.
Some may try to blame the province’s current situation on the downturn that has hit the oil sector, and obviously, this is a large segment of the economy. But it is by no means the largest. In fact, its importance to the provincial economy has been steadily declining. In the late 1990s, the entire energy sector represented 43% of the economy, whereas in 2015, this proportion had dropped to 30%.
Alberta did benefit from the oil boom, but its steady growth was also driven by the financial sector, the services industry, and the construction industry. The rise of these sectors depended on a tight control of public finances, low taxes, and a light regulatory touch.
Unfortunately, recent public policy decisions in the province are very far removed from the sound policies that made Albertans so rich in the first place. Let’s hope for the sake of all Canadians that Alberta rediscovers its tried-and-tested recipe for success.
Jasmin Guénette est vice-président de l'Institut économique de Montréal, Vincent Geloso est chercheur associé. Ils signent ce texte à titre personnel.