As part of Alberta Premier Jason Kenney’s push for Ottawa to recalculate its fiscal stabilization fund, he cited government bonds Sunday as a dire indicator of the necessity for federal aid.
“To be blunt, there were a few weeks where we couldn’t sell Alberta government bonds,” Kenney said in an interview on CTV’s Question Period. “We weren’t the only provincial government in this crisis to face that situation.
“The federal government is not so encumbered. So really, what we do need is that flexibility that allows us to address our local needs.”
Kenney has long sought to persuade the federal government to make changes to its fiscal stabilization program, something former finance minister Bill Morneau said he would be open to late last year.
The program provides financial assistance to those provinces and territories experiencing significant economic declines. In 2019, the province submitted a request for $2.4 billion in fiscal stabilization money going back five years.
But amid the hit of the global pandemic and the oil price war between Saudi Arabia and Russia, Alberta upped that request to $6 billion.
Kenney, Ontario Premier Doug Ford, Manitoba Premier Brian Pallister and Quebec Premier François Legault attended a meeting in Ottawa last week intended to call for a number of changes from Ottawa on behalf of the country’s premiers, including introducing changes to the fiscal stabilization program.
When asked about Kenney’s strategy, former Alberta NDP cabinet minister and current MLA Shannon Phillips said Kenney was trying to “distract from his economic record and his failure to revive the economy.”
“When Mr. Kenney says that we may need a renegotiated fiscal stabilization from Ottawa, in fact, I don’t disagree with him at all on that point,” Phillips said. “What I do have a quarrel with is a lie. When Mr. Kenney says we can’t borrow on the international markets, it’s a lie.”
Provincial government bonds
Though Kenney cited government bonds in an attempt to contextualize the province’s struggle in recent months, that situation isn’t unique to the province, said University of Calgary economist Trevor Tombe.
“It’s not surprising to hear that Alberta had challenges selling some of its bonds early on in this crisis. That was the case for most provincial governments, if not all,” he said.
“It was really one of the key reasons the Bank of Canada stepped in early on to start purchasing directly provincial government bonds.”
Announced in April, the Provincial Bond Purchase Program saw the central bank announce it would buy up to $50 billion worth of provincial bonds, with terms up to 10 years.
In order to borrow, governments sell a promise to repay a certain amount in the future, essentially selling an “IOU.”
“If you have faith in the entity that is issuing those bonds to repay, what they promise in the future, then you’re willing to buy that promise up front,” Tombe said.
“So governments borrow by selling those promises, and the interest rate they pay is implicitly that difference between what people are willing to pay today for the promise to receive a certain amount in the future.”
According to Alberta Finance spokesperson Jerrica Goodwin, the province was not able to sell its bonds early in the pandemic, though it has been issuing bonds successfully since then.
“There were a few weeks in March — coinciding with earlier days of the global pandemic and the Russia-Saudi oil price war — when the markets were not operating as usual, causing concern about funds necessary for government operations,” she said in an email.
Though Tombe said it was fairly rare for governments to find themselves unable to sell government bonds, he added that it was not something to read into amidst a heavily disrupted market.
“I’d go so far as to say it says nothing about the fiscal situation in Alberta,” Tombe said. “Our deficit is large, certainly, and we have big fiscal problems, but we have the capacity to borrow, carry and service debt, at least in the short and medium term.
“Which is not to say we shouldn’t take some hard choices and fix our longer-term trajectory we’re on. But no credible investor would be raising concerns about an Alberta default.”
Looming deficit
In August, Alberta’s finance minister said the province was on track to end the fiscal year with a $24.2-billion deficit — the largest in the history of the province.
Such figures have prompted the provincial government to unveil strategies they feel will pressure Ottawa into providing aid, such as those studied as part of its so-called “fair deal” panel.
Tombe said though he wouldn’t characterize federal funds as being necessary to Alberta’s fiscal strategy, he would characterize them as being beneficial.
Alberta and other provinces are looking to Ottawa to provide cash, Tombe said, because the federal government can borrow more cheaply than provinces can.
“So if the federal government issues bonds in order to provide cash transfers to provinces, which means the provinces don’t need to issue those funds,” Tombe said. “Then that lowers the overall interest costs for Canada as a whole, making debt cheaper for taxpayers at the end of the day.
“The trick, though, for the federal government, is they can’t be providing cash in a way that would encourage provinces to make bad choices in the future.”
Alberta’s challenge moving forward, Tombe said, is where it goes next on the path to future deficits.
“We are going into this crisis with a strong balance sheet and we’re going to come out the other side with still a strong balance sheet,” he said. “But the question is, what do we do next year, the next year, the next year after that?
“That’s going to require some hard choices on both sides of the budget — taxes and spending.”
