October 26, 2012 – MLI's study, Provincial Solvency and Federal Obligations, by author Marc Joffe, is the subject of a latest editorial in The Globe and Mail today! The editorial calls Joffe's conclusions "quite persuasive." An excerpt below:

Surprisingly, Alberta is in the greatest danger – in the long term – of default, according to a study by Marc Joffe, formerly of Moody's Analytics, commissioned by the Macdonald-Laurier Institute. Quebec, currently the most fiscally troubled, is in the least peril – that is, over the next 30 years.

Mr. Joffe compares interest expense with revenue, in a simulation based on current trends, extended over the coming three decades. The Alberta government's large deficits and the provincial economy's exposure to volatile oil-and-gas revenues make his conclusions quite persuasive. He adds the less familiar point that Statistics Canada predicts that the population of Alberta will age more quickly than those of other provinces – with concomitantly greater health-care costs, as well as a diminishing labour force.

The full editorial is copied below

Debt, and the long-term vulnerability of Alberta

The Globe and Mail, October 26, 2012

Jim Flaherty, the Minister of Finance, acknowledged on Wednesday that the federal government has put on hold its targets for eliminating not only its own debt but also the net government debt for the whole country, including the provinces. He is probably right that the provincial governments' prospects of debt reduction are much more dubious than Ottawa's.

Surprisingly, Alberta is in the greatest danger – in the long term – of default, according to a study by Marc Joffe, formerly of Moody's Analytics, commissioned by the Macdonald-Laurier Institute. Quebec, currently the most fiscally troubled, is in the least peril – that is, over the next 30 years.

Mr. Joffe compares interest expense with revenue, in a simulation based on current trends, extended over the coming three decades. The Alberta government's large deficits and the provincial economy's exposure to volatile oil-and-gas revenues make his conclusions quite persuasive. He adds the less familiar point that Statistics Canada predicts that the population of Alberta will age more quickly than those of other provinces – with concomitantly greater health-care costs, as well as a diminishing labour force.

Alberta's Heritage and Sustainability funds have been slowly but steadily drained, in particular by the Stelmach and Redford governments' annual deficits.

Thirty years are quite a long time. There will be opportunities to reverse the trend, but the acknowledgement of the problem could easily come at a very awkward time, at a trough in the commodities cycle, when a retrenchment could exacerbate a recession.

The long-term vulnerability of Alberta should not be a great surprise. Overconfidence can be disastrous, as the financial crisis of 2008 vividly showed. The bond markets may be overconfident now about Canadian provinces, because, in the Great Depression, Ottawa bailed out (to varying extents) four of them, including Alberta, which nobody then thought of as a rich province.

If Alberta runs into serious trouble in two or three decades, it may not attract as much sympathy as it did in the 1930s.

Premier Alison Redford and Doug Horner, the Minister of Finance, need to change course in their next budget – while the next election is still a comfortable way off.

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