July 19th, 2018

Guest Column: Alberta buys another ticket on the resource revenue roller-coaster

By Medicine Hat News Opinon on April 9, 2018.

Before forming government, Rachel Notley and the Alberta NDP vowed to get the province “off of the resource revenue roller-coaster.”

So it’s ironic that now-Premier Notley’s third budget promises to take the province on yet another ride. Her government’s vague and risky “path to budget balance” relies on future growth in natural resource revenue to hopefully eliminate Alberta’s deficit many years from now.

In 2014, when oil prices collapsed, Notley, then leader of the opposition NDP, had little sympathy for premier Jim Prentice’s predicament. “The PCs claim it’s a crisis every time the price of oil drops,” she stated while criticizing the government for “riding this revenue roller-coaster for years.”

When resource prices are high, money pours in to Alberta’s coffers and government spends freely. When resource revenues fall, big deficits tend to emerge.

In some respects, Notley’s 2014 statement was bang-on. In the decade prior to the oil price collapse, successive Progressive Conservative governments spent as though good times would never end. When bad times arrived and revenue fell, the government predictably faced a significant shortfall. Clearly, if previous PC governments exercised greater spending discipline, the deficits of recent years would have been much smaller.

Now, as Alberta recovers from recession, Notley calls the shots about how to deal with the deficit. And in her third budget, she offers a simple plan: Buy another ticket on the revenue roller-coaster she once decried and hope for royalty revenue growth to take care of the problem.

The numbers tell the story. The budget projects operating deficit in Alberta this year will be $8.8 billion. Thanks to recent spending increases, this is only slightly down from the peak of $10.8 billion in 2016-17.

The government’s complacency about the province’s large deficits going forward is remarkable, as the budget projects almost no progress in its three-year detailed fiscal plan. In 2020-21, the deficit will still be almost $7 billion.

After 2020-21, the detailed fiscal plan ends and what’s left is a vague “path to balance” showing that at that point the deficit starts to shrink much more quickly before disappearing completely in 2023-24.

So how exactly does the government think it will make so much progress on the deficit then given that it’s making so little progress today?

The answer, unfortunately, is that it’s simply hoping for natural resource revenues to grow quickly in its “path to balance” and take care of the deficit.

Consider that between 2018-19 and 2023-24, the government projects resource revenues will increase by $6.6 billion. This accounts for three-quarters of the $8.8-billion deficit it has to eliminate. In other words, the government’s plan is essentially to cross its fingers and hope for more resource royalties.

The budget forecasts natural resource revenues in 2023-24 will represent 16 per cent of all provincial revenues. This compares to 18 per cent in 2014-15, the year before the effects of falling oil prices were fully felt. So the government’s plan to balance the budget explicitly requires riding the once-derided revenue roller-coaster back to nearly the same height as before the recent fall.

This means if resource revenues don’t increase quickly, big deficits will persist. The reason for this is that after three years in power, this government has shown no appetite to address the root cause of Alberta’s troubles: Government spending.

Despite dire fiscal circumstances, total spending has grown under this government by 14.5 per cent between 2015-16 and 2018-19. It projects slower spending growth going forward, but the budget makes no serious effort to reform spending or roll back recent increases.

Instead, the plan is to merely slow down the rate of growth and, again, hope for resource royalties to do the heavy lifting.

Notley’s government has failed to put the province on a safer fiscal trajectory. This budget confirms the government’s deficit-reduction strategy is simple but flawed: Buy another roller-coaster ticket and hang on for the ride.

Ben Eisen and Steve Lafleur are analysts with the Fraser Institute’s Alberta Prosperity Initiative.

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