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Government policy, not volatile commodities, drive public debt: Study

A new study says fiscal policy has the biggest impact on debt accumulation, even though it's the one factor over which politicians have total control



CALGARY—Governments in provinces relying on natural resource commodities for significant amounts of revenue face the distinct challenge of unpredictable fluctuating budget circumstances. As politicians routinely point out, much of that challenge is in the volatility of global commodity prices. But a big part of it is actually the policies of the governments themselves.

Two reports released today by The University of Calgary’s School of Public Policy show that when effects of commodity prices, economic cycles and fiscal policy are separated from one another, government policy has one of the biggest impacts on government debt over the last 30 years in Canada’s four resource-dependent provinces—Alberta, Saskatchewan, British Columbia, and Newfoundland and Labrador.

Suffering a similar problem are four of Canada’s economically smallest provinces: PEI, New Brunswick, Nova Scotia and Manitoba. While not subject to the difficulties resulting from swings in energy prices, the study;s author says they are nonetheless victims of economic shocks originating from outside the province and well beyond their abilities to control.

To better enable their economies to recover quickly from these shocks, governments in these province must maintain a high degree of fiscal discipline. Unfortunately, fiscal policy choices have often proved to be their undoing.

“It is difficult to identify any consistency in behavior vis-à-vis political parties. No political party has a monopoly on making good (or bad) fiscal policy choices,” said the reports’ author Professor Ron Kneebone.

His report says provincial budgetary choices since 1980 reveal provincial debt is accumulated from decisions to increase spending without corresponding tax increases (or decisions to cut taxes without corresponding spending decreases).

Further, political parties on the right have been as frequently to blame for accumulating debt as parties on the left.

“Whatever the politicians in resource-dependent or economically small provinces say about their unpredictable budgeting challenges, clearly policy has the biggest impact on debt accumulation. As it happens, that is also the one factor over which those politicians actually have total control, and should be held totally accountable,” says the report.

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