Comparisons of standards of living among the largest states and their fiscal approaches provide insight into which approach best supports prosperity. Research comparing key economic data finds that states following the principles of limited government are a blueprint for prosperity.
The Fraser Institute in Canada recently published a report that highlights this debate. The authors compare different measures of standards of living of two large oil-producing jurisdictions in North America (see Figure 1) along with their fiscal approaches: Texas with limited government in the U.S. and Alberta with excessive government in Canada.
The oil and gas boom from 2004 to 2014 led to relatively strong economic performances in both jurisdictions, beating their national averages by substantial margins. Alberta even outperformed Texas in terms of private sector job creation and lower unemployment rates during much of the period, albeit roughly seven times more people reside in Texas.
However, the two jurisdictions diverged in how they conducted fiscal policy. Figure 2 shows that per capita government spending in Alberta was well above that in Texas. Alberta’s per capita government spending was 68.4 percent more than Texas in 2004-05 and increased to 82.8 percent in 2013-14.
The rapid rise of Alberta’s government expenditures, which outpaced the key economic measure of population growth plus inflation, contributed to large budget deficits. These deficits eroded the value of Alberta’s net financial assets to gross domestic product (GDP) from 7.8 percent in 2004-05 to 2.9 percent in 2013-14, jeopardizing their economic condition. Meanwhile, Texas was able to better manage their fiscal situation as the value of the state’s net debt to GDP increased 0.9 percent to 1.9 percent.
Economic diversification helped Texas withstand the steep drop in oil prices since mid-2014. For example, Texas’ real economy expanded by 3.8 percent in 2015 while Alberta’s economy tanked by 4 percent—increasing the cost of fiscal ineptitude in prior years. With a balanced budget not expected until 2024, Alberta’s net financial asset position is expected to flip to a net debt position of 6.7 percent of GDP by 2017-18, substantially above that in Texas.
While Texas was not immune to the drop in oil prices, Figure 3 illustrates that the Lone Star State weathered a potential crisis relatively well from a much better fiscal position and a more diversified economy, ultimately emerging with a brighter fiscal outlook.
The authors of the report concluded that the difference in fiscal policies from both jurisdictions has put Texas in a relatively stronger financial position compared to Alberta. Although Texas has done relatively well versus Alberta for years, there’s much more that needs to be done to limit the state’s size and scope of government.
Bottom line: It’s essential for governments to restrain spending to limit excessive tax burdens on individuals so they have the best opportunity to prosper.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.