Alberta's NDP government faces an obvious problem as it prepares to release its 2017 budget on Thursday — its revenues have cratered while its expenses continue to rise.

Some of those cost increases have been by choice; others are contractual obligations. Public sector compensation accounts for 50 cents of every dollar the province spends, and many contracts negotiated years ago include built-in, annual raises that keep edging that total upward.

But the new fiscal year also offers a new opportunity to "bend the curve" on spending growth, as politicians like to say.

On April 1, the contracts of tens of thousands of public-sector employees will expire. The biggest cohort is health-care workers, including some 28,000 nurses, 24,000 support-service employees and 19,000 paramedics employed by Alberta Health Services.

Together these employees draw billions of dollars in salary from public coffers. Health-care spending, as a whole, makes up nearly 40 per cent of the province's total expenditures.

If ever there was a chance to rein in spending, the government now has one at the bargaining table, but negotiating with powerful unions who provide critical public services is no simple task.

"I don't envy the situation that the government is in," said Gary Mar, a longtime cabinet minister in Alberta's previous PC governments, whose portfolios included health.

"It's not an easy process to go through. Perhaps even tougher if you're an NDP government with deep connectivity to the unions."

hi-mar

Gary Mar served as Alberta's minister of health and wellness from 2000 to 2004. (CBC)

The NDP has historically been labour-friendly.

However, there are signs the party is hardening its bargaining position now that it's in government and staring down a $10.8-billion deficit for the current fiscal year, according to Lori Williams, a professor of economics and policy studies at Mount Royal University.

She said the government has "set the stage" for upcoming negotiations with several recent moves, such as:

"This is going to be a bit of a tense issue," Williams said of the looming labour talks.

Just last week, 14,500 auxiliary nursing staff ratified a new contract after an extended mediation process, in which members agreed to retroactive raises of 1.2 per cent and 0.8 per cent.

That's more than what many employees in Alberta would expect in the current economy but still below the rate of inflation and what the sector has seen in the recent past.

Riding a revenue roller-coaster

The turn of the millennium ushered in a more prosperous era for the Alberta government — and it spent accordingly.

It would have been hard not to crack open the public purse, as the province seemed to have turned the corner after the massive deficits of the early 1990s and the cutbacks that ensued.

Alberta's budget surplus reached a high point, relative to GDP, in the 2000-01 fiscal year.

Natural gas prices soared and royalties swelled to an astonishing $7.2 billion, tripling the previous year's mark, which itself had set a record.

Non-renewable resources as a whole, including oil, accounted for 41.5 per cent of the province's revenue that year.

Today, it's less than six per cent.

So one could imagine how it would have made sense at the time to finally, say, give physicians a raise — especially after dealing with what the Medical Post had dubbed a "new wave of militant doctors" in the late 1990s who reduced office hours, refused new patients and threatened to strike in a series of escalating bargaining tactics.

"Yes, we had the benefit of more money coming in the door, but we didn't overspend," said Mar, who served as health minister from 2000 to 2004.

"We were very conscientious about spending an appropriate amount of money but not going overboard."

Soaring costs 'jeopardizing' health care

After a decade of sustained spending growth, however, the trajectory had become alarming.

An Alberta Health report from 2013 warned unsustainable cost increases were "jeopardizing the fiscal sustainability of the public health-care system."

It highlighted how provincial health expenditures grew at average rate of 10.4 per cent each and every year, for 10 straight years.

Spending on physicians, specifically, grew even faster — at 12.4 per cent.

By that point, the province had started clamping down on physicians' compensation packages. In late 2012, the PC government imposed a contract on doctors after nearly two years of negotiations.

The Alberta Medical Association later agreed to a seven-year deal that included three retroactive years with no pay increases, followed by a 2.5 per cent increase for the next two years, and then a cost-of-living adjustment in the final two years.

Still, for a variety of reasons relating to service delivery and growth in the number of physicians working in the province, the cost increases continued.

Alberta now spends twice as much on doctors, on a per-capita, inflation-adjusted basis than it did in 1999, according to estimates from the Canadian Institute for Health Information.

This interactive graph depicts per-capita health spending, adjusted for inflation (constant 1997 dollars), by expense type:

'It really diverges from B.C.'

With British Columbia releasing another balanced budget last month, Alberta's neighbour to the west has become a common point of comparison for government revenue and spending.

Blake Shaffer, a fellow with the C.D. Howe Institute, dug deep into the Statistics Canada data and found Alberta's public-sector wages were actually lower than those in B.C. until the year 2000, when they suddenly spiked.

Alberta has maintained a wage "premium" ever since, which Shaffer said is somewhat to be expected, given that private-sector wages increased along a similar trajectory during the same decade.

But he noted that not all public sector salaries grew at the same pace. Those in the health and social service sector, in particular, stood out for their rapid ascent.

Health salaries AB vs BC

A comparison of wages in the health and social service sectors in Alberta and B.C., based on Statistics Canada data. (Blake Shaffer/CANSIM 183-0002)

"It really diverges from B.C. and — given that health is by far the biggest spending item in Alberta's budget — if I'm the finance minister, that's exactly the area that I'm focusing on," Shaffer said.

Williams, with Mount Royal University, said the fact that doctors agreed last fall to modify their existing contract mid-term to include specific elements aimed at containing health-care costs sends a strong signal that the same will be expected in other health-care contracts.

"Doctors often lead this sort of thing," she said.

Lori Williams MRU

Lori Williams is an assistant professor in the Faculty of Economics, Justice, and Policy Studies at Mount Royal University in Calgary. (CBC)

Williams expects "tough negotiation" but doubts the NDP government will go as far as a wage freeze.

She thinks the range that the auxiliary nursing staff agreed to — annual increases of around one per cent — will become the standard for other contracts, too, both in the health-care field and elsewhere in the public sector.

Alberta's 33,000 public-school teachers are currently embroiled in contract negotiations.

Some 24,000 direct government employees — another group whose wages grew disproportionately quickly over the past decade, according to Shaffer's calculations — will see their contract expire at the end of the month.

"There's no way they're going to give any of these groups the increases that they want," Williams said of the government's bargaining position.

"They can say, 'Look, we're not in a good position right now. There are a lot of Albertans that don't have jobs at all. We've got to have a reasonable increase here. And, down the road, when the economy is better, we might be able to have a different conversation.'"