The dynamics of fiscal adjustment in Alberta

Abstract

This paper investigates the effects of budgetary imbalances on various fiscal variables using time series data from Alberta spanning over half a century. Our empirical analysis reveals Alberta responds to budget deficits by cutting program spending and raising tax revenue. The results indicate that in response to a one percentage point increase in the current budget deficit to GDP ratio, Alberta’s governments have cut program spending by 0.24 percentage points and raised tax revenue by 0.06 percentage points the following year. These results imply that about 80 percent of the short-term fiscal responses to budgetary imbalances appear on the spending side of the provincial government budget. The empirical results of this study provide evidence of the asymmetric effects of fiscal imbalances on tax revenue and government program spending in the province. We also find that the provincial governments’ spending response to the budget deficit depends on whether oil prices are predicted to increase or decrease.