An Alberta budget crisis? It may be closer than you think

In fact, markets seem to be factoring in this very risk. On Monday, Alberta’s largest oil producers opened sharply lower in the early hours of trading, despite rising oil prices that morning. Whether this becomes a full-blown budget crisis remains to be seen. But with oil prices under pressure and Alberta more exposed than ever, the margin for error has narrowed considerably. How did Alberta get here? The answer lies not just in global markets, but in fiscal choices made by the provincial government, especially in several of its recent budgets. First, Premier Danielle Smith’s first budget in early 2023 significantly boosted spending, financed largely by a spike in resource revenues following Russia’s invasion of Ukraine. That budget projected more than $12.5 billion in resource revenues over and above what had been forecast just two years earlier. Out of that, it then planned to spend $10 billion more. It was the largest unplanned spending increase since the late years of Premier Ralph Klein’s government, which consumed almost all the windfall. At the same time, taxes have come down. Gas taxes were cut when oil prices were high, and personal income tax reductions last year widened the gap between Alberta and other provinces further. On an inflation-adjusted, per-person basis, Alberta’s tax advantage is now as large as it has ever been. High spending and low taxes are only sustainable if oil prices cooperate. They haven’t. Next month, Alberta will table its 2026 budget. If oil prices don’t improve, the deficit could easily top $10 billion. That would rival the deficits of the COVID years and the nearly $11 billion shortfall of 2016, which followed another oil price collapse. To be clear, Alberta is in a strong position and can absorb the hit well. But if oil prices remain low, these deficits could stretch far into the future. And here’s where the province’s own fiscal rules—introduced by Premier Smith’s government in its first budget—complicate matters. The province’s “Fiscal Framework” requires that, while running a deficit, total government spending must be frozen in nominal terms. That means no increases, even if inflation and population grow. More critically, the law allows for only three consecutive deficits. By 2027, Alberta would hit that limit. What happens then? Even if spending were frozen for the next several years, Alberta would still face a deficit of about $7 billion in 2028, I estimate, if energy prices stay where they are. To close that gap would require a spending cut of roughly $12 billion relative to the current plan—or the introduction of a general provincial sales tax in the range of six percentage points. Either would be a dramatic shift. More realistically, the government could abandon its new fiscal rules entirely. But that only pushes the problem further down the road—and makes future corrections even harder, especially if the long-term outlook becomes more difficult. Consider this: If oil prices stay where they are now for the next 25 years—a scenario no one can predict with confidence, but worth contemplating—the province would need to permanently raise revenues or cut spending by about 1.7 percent of GDP to make up for it, I estimate. That would mean introducing a broad sales tax comparable to BC’s. For a province that has long prided itself on being a low-tax jurisdiction, that would be a seismic shift. Alternatively, the equivalent spending cut would require reducing provincial operating expenditures by 10 to 15 percent across the board. Also a heavy lift in a growing province. Suffice it to say, something will have to give. Soon. Planning for a lower-price future Alberta’s budget remains more exposed to oil prices than ever before. That’s not the result of forces beyond our control, but of choices: higher spending, lower taxes, and a growing dependence on volatile resource revenues. If prices stay low, as many expect, the consequences will be difficult to avoid. But a crisis isn’t inevitable. Alberta has options. It could restrain spending growth, pursue broader public sector reforms, or explore modest changes to tax policy—including a health care payroll tax, which many other provinces already use. A more credible fiscal anchor and a renewed commitment to saving resource revenues, as former premier Jim Prentice most recently envisioned, would also help. This may also be the right time for a full review of the province’s fiscal framework, or perhaps even establishing an independent commission/entity with a mandate to assess Alberta’s finances and report publicly. Some other provinces have that, and federally, we have the PBO. If the province wants to avoid a painful reckoning, it will need to make thoughtful, forward-looking decisions soon. A budget crisis may not be guaranteed. But if nothing changes, it may be closer than you think.