The Dynamics of Fiscal Adjustment in Alberta

This paper analyzes how Alberta’s provincial governments have historically responded to fiscal imbalances, using annual data from 1973 to 2023. The study finds that when deficits occur, Alberta adjusts primarily through spending cuts rather than tax increases. Specifically, a one percentage point increase in the deficit-to-GDP ratio leads to a 0.24 percentage point decrease in program spending and a smaller 0.06 percentage point rise in tax revenue the following year. These findings show that roughly 80 per cent of short-term fiscal adjustments fall on the spending side of the budget.  

The analysis also uncovers asymmetries in Alberta’s fiscal responses. Surpluses tend to fuel spending increases, but tax reductions are rare, while deficits generate modest spending restraint and some tax hikes. Alberta’s reliance on volatile non-renewable resource revenues amplifies these swings, leaving the province in a cycle of boom-and-bust budgeting. The study concludes that to achieve long-term fiscal sustainability, Alberta must restrain spending during periods of surplus, reduce dependence on oil revenues, and direct windfall revenues into savings vehicles like the Heritage Savings Trust Fund.