Alberta's bumpy ride only gets bumpier with Danielle Smith's budget

This column is an opinionby Trevor Tombe, a University of Calgary economist.For more information aboutCBC's Opinion section, please see theFAQ.

"Remaining disciplined and responsible is most difficult during years of plenty," said Finance Minister Travis Toews while delivering this year's provincial budget. He added: "The tendency to unsustainably increase spending as revenues rise is almost inevitable."

He's right.

And Budget 2023 did just that.

Spending is set to exceed $68 billion this year, higher than the government's own previous plan of $64 billion for 2023-24 set only three months ago, and more than $9 billion more than what Budget 2021 envisioned for this year. It is even higher than the previous NDP government had planned to spend this year, if that party had remained in power.

As Alberta's first pre-election budget in eight years, a flurry of new spending may have been inevitable, but the scale of the increase is stunning.

Consider this: If Budget 2021's spending plans for this year were maintained, Alberta's surplus would be nearly $12 billion instead of the $2.4 billion now planned.

To be clear, these spending increases might be warranted. And perhaps the government decided its prior restraint was unwise. A different premier naturally comes with different choices.

The problem is that this new spending is paid for with an incredibly unreliable source: non-renewable resource revenues. This is neither disciplinednor particularly responsible.

It is, of course, a familiar problem in Alberta. But today, that problem may be worse.

Budget 2023 shows Alberta has entered a new fiscal reality where we are more reliant on resource revenues and more exposed to risks.

The new normal

Although oil prices have fallen recently down more than one-third from the peak of over $120 US per barrel last year resource revenues remain at dizzying heights.

The reasons are simple. The volume of production is way up (now roughly double our 2010 levels) and more facilities have paid off their initial capital investments, meaning royalty payment rates to the government rise significantly.

Each dollar in oil prices is therefore worth much more to the government than before.

To see this, I plot the relationship between oil prices and oil royalties below. Compare the coming years to 2018 and 2019. Oil prices (adjusted for inflation) are fairly similar yet total resource revenues are twice as large today.

While this is good news, spending the windfall means we are more exposed to the eventual and inevitable drop in energy prices.

We previously needed oil prices of $70 US per barrel to balance the books. Now, I estimate we need $75. That's risky.

It also means the budget is much more volatile than it used to be.

Mr. Toews's wildride

For the quarter-century before COVID, a $1 change in oil barrel prices typically meant less than a $200 million increase or decrease to government revenues. Today, that same change is worth $630 million.

I estimate by 2025, it will be $850 million.

If you thought the roller-coaster Alberta was on before was scary, just wait.

The government knows this problem exists. In fact, a central focus of the Smith government's budget was "a new fiscal framework to help deal with Alberta's unique economic and revenue volatility."

It requires a balanced budget (unless revenues fall), limits spending growth to inflation plus population growth (conveniently allowing today's big increase, with inflation so high), and creates a rule to allocate surplus cash (including on new "one-time" spending).

This framework falls far short of addressing its own stated goal. To achieve any meaningful degree of stability in Alberta's finances, more resource revenues must be saved.

Drops for the rainy day fund

There was a $1.8-billion contribution to the Heritage Savings Trust Fund for 2022-23. A seemingly large sum compared to past years, but it amounts to only6.5 per cent of total resource revenues. When Peter Lougheed established the fund in the 1970s, 30 per cent of annual resource revenues were dedicated to it.

The budget also proposes to stop withdrawing investment income from the fund. As a result, the Heritage Fund will grow to nearly $23 billion by 2026 from $18.9 billion now. This is welcomebut also modest.

For perspective, look at Quebec.

Its Generations Fundtakes most of its resource revenues (mainly from hydro power), along with a portion of alcohol taxes. Income generated in the fund is also fully retained. The province anticipates annual contributions to reach nearly $5 billion by 2025-26. In total, Quebec's savings fund will be larger than Alberta's this year, and far surpass it soon.

I can appreciate the political challenge here.

Alberta's last pre-election budget from Premier Jim Prentice in 2015 featured a bold move to save fully half of all resource revenues. It would have been the largest fundamental shift in Alberta fiscal policy in a generation.

To make up for the hole this choice created in the budget, however, that Progressive Conservative government cut spending and raised taxes. Higher personal income taxes, higher alcohol and gas taxes, and a new health-care levy.

Whatever the policy merits, it was a political gamble that did not pay off. When put to Albertans in the election that year, the Tories were shown the door.

Perhaps the current government looks back on that experience with fear.

That's the wrong lesson. Today, unlike then, Alberta is benefiting from high resource revenues a much easier situation than 2015.

This budget was a unique opportunity to present a longer-term vision beyond the next election. It was an opportunity to finally help stabilize Alberta's finances. It was an opportunity to save windfall dollars that we were not previously counting on.

But in the end, it made instability and risks worse. It was an opportunity missed.

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