The Dynamics of Fiscal Adjustment in Alberta

This study looks at how Alberta’s provincial governments have responded to budgetary imbalances, focusing on the connection between program spending, tax revenue and the volatility of non-renewable resource revenues. The study uses annual time series data from 1973 to 2023 to identify the fiscal responses to changes in the budget’s deficit-to-GDP ratio. Alberta primarily adjusts to fiscal imbalances by cutting spending rather than by increasing revenue. For example, a one percentage point increase in the deficit-to-GDP ratio leads to a 0.24 percentage point reduction in program spending and a 0.06 percentage point increase in tax revenue in the following year. These results suggest that approximately 80 per cent of short-term fiscal adjustments fall on the budget’s spending side.

The results also show asymmetries in Alberta’s fiscal responses. When deficits arise, governments tend to raise tax revenue but are less inclined to cut spending. Conversely, when surpluses occur, governments increase program spending but do not lower taxes. Thus, while deficits lead to modest adjustments, surpluses create upward pressure on spending and undermine long-term fiscal balance. The province’s heavy reliance on resource revenues exacerbates this situation, as volatile oil prices directly influence fiscal outcomes. For example, when oil prices are expected to decline, governments are more likely to cut program spending; however, when prices are forecast to rise, there is no reduction in spending even when there is a deficit.

These are significant findings given Alberta’s unique fiscal situation. Unlike other provinces, Alberta relies extensively on non-renewable resource revenues, which puts the budget at the mercy of sharp fluctuations. This dependence makes Alberta’s budgetary balance among the most volatile in Canada and leaves the province in a state of chronic fiscal vulnerability and long-term sustainability challenges.