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Public debt management, the Alberta example

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Alberta has joined other Canadian provinces by opting for questionable debt financing of infrastructure developments. Without better policies and practices, Alberta’s public debt can become an unruly beast.

The data on provincial debt indicates that Alberta has plenty of room to borrow more money. In the recently released Macdonald-Laurier Institute study, Provincial Solvency and Federal Obligations, Alberta’s March 2011 net debt is in a negative position, indicating that its low level of debt is outweighed by its financial assets.

But now Alberta’s opposition politicians, and indeed her taxpayers, are putting Premier Alison Redford’s decision to borrow more money under the microscope. As an outside commentator, (I reside in New Zealand but work with local governments in canada), the decision represents an opportunity to deal with public sector debt from "the get go."

Fortunately, Alberta’s problem is quite different from the usual circumstances where public debt, largely due to a lack of forethought, has become unsustainable. The debt is probably sustainable.

But there are some principle-based guidelines that can keep the provincial financial policies manageable and sustainable.

The policies inter alia clearly recognize the equity perspectives of both current and future taxpayers. In principle, debt funding permits investment in public assets whose immediate productivity gains are desirable. The acquisition of this type of debt should not be tied to capital expenditure limitations.

So how should this important public debate proceed?

Our experience here in New Zealand may be useful. The principle recognizes the connection between current and future benefits of asset ownership by roughly matching the future benefits with the relevant debt funding.

In practice, this is more often than not achieved by matching the future benefits of the asset with the repayment term (number of years) of the debt. This will reduce the level of debt, a desirable outcome, because long life assets (say of 30 or more years) last longer than the debt repayment, (say 15 to 20 years).

Here are four public debt management principles that could guide the Alberta government. Of course, a full description of these principles would be too long to include here.

• Some provincial debt is desirable, but debt servicing costs must be sustainable relative to taxpayer affordability;

• Debt must never be used to meet present operating expenditures because these expenditures only have current benefits.

• The decision to borrow will obviously favour projects that deliver reasonable debt servicing revenue streams.

• Debt management parameters must be set so they adhere to principles of both democracy and good management.

These are the cardinal policy principles, but there are many more considerations that are required to support good public sector debt management policies. Many of these considerations directly relate to the political influences.

These four principles will inevitably come under political attack, reflecting the pervasive temptation of governments to try and increase debt maxima, to stretch debt benchmarks and, if unregulated, to raid debt repayment funds. Invariably these ill-advised escapades are made for politically-attractive reasons... most often (surprise-surprise) at times just prior to elections.

Another important control factor is the regulator in the exercise of disciplining governments which forces governments to comply with public accountability regulations. Central to all controls, however, are active, informed and independent citizens who want good, but cost-effective, government.

No doubt, it takes concerted, conscious efforts by many people to control public debt. The legitimate concerns of those who oppose any debt funding often turns on their fears of being savaged by an unruly beast — debt.

In the absence of proper controls, a savaging is possible. The human factors alone, that is the self-interest of the politicians if left to their own devices, will play ringmaster to the beast while running a circus.

Alberta, with careful forethought and principled planning, can learn "from New Zealand and the others." The province has this one-time opening shot at getting its debt management right. But, further work needs to be done by politicians and citizens.

 

Larry. N. Mitchell is a fellow at the Frontier Centre for Public Policy. He is a New Zealander who works on financial policy and performance improvements with local governments in Australasia and Canada. He is the author of the NZLG Annual financial sustainability League Table and the Base Stats with Trends Council performance reports.

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