Ron Kneebone is a Professor at The School of Public Policy at the University of Calgary
On Thursday, the government of Alberta released a budget that Premier Jim Prentice has sold as a response to a fiscal crisis of the sort not seen in a generation. It promises cuts to spending, increase tax rates, and start saving oil revenues.
I know what Canadians are thinking: They wish their province had Alberta's problems. Since 2000, the revenues the provincial government collects from the sale of oil and gas has accounted for an average of about 30 per cent of its revenues. That is considerably larger than the share of total revenue provided by the personal income tax in every other province. Imagine governing a province that has access to a revenue source that provides more revenue than the personal income tax provides other provinces; revenue that flows to you without the need to upset voters by taxing them.
But there's a catch. How much revenue the government will receive from this source is uncertain and is largely unpredictable. In 1987, for example, the government collected 60 per cent less in resource revenues than in the year previous; a loss in revenue greater than the total amount of personal income taxes collected that year. So now imagine governing a province when the equivalent of all personal income tax revenue might disappear on you from one year to the next.
Another catch is that when money comes easily, it is also easy to spend. In 2013-14, Alberta spent, on a per capita basis, 22 per cent more than British Columbia, a province with a similar sized population. All that spending also means no saving has been done. After taking inflation into account, each Albertan's share of the province's Heritage Fund is worth less now than it was in 1980. Easy come, easy go.
So, what to do? The government has decided to do what economists have been telling them to do for a very long time, namely, to abandon its high-risk budgeting strategy of funding health care, education and other programs using revenue that is uncertain and unreliable. In a School of Public Policy report published two years ago – which, interestingly, has in its title the same reference to a 10-year plan for ending Alberta's reliance on oil revenues as is made in the budget – my co-author and I provided a menu of policy choices to accomplish this goal. They all involved significant spending cuts. We emphasized that throwing more revenue into the budget would never do what was necessary because at the heart of Alberta's fiscal problem is that spending is growing faster than revenue. More revenue can temporarily close the gap between spending and revenue but unless the growth in spending can be slowed the gap can never be closed.
In Thurday's budget, the government seems to have taken this advice. It has promised to hold spending on health and other programs more or less constant. But that means, with population and prices both projected to grow by about 1.7 per cent annually, the amount spent on each Albertan will fall by 3.4 per cent a year. That is a significant cut, and if maintained for three years as planned it will quickly close the gap between what the government spends and what it collects in taxes - and so will enable the government to begin saving resource revenues in a few years. Now the question is whether the government can stay the course its has laid out. Ironically, the government's biggest challenge may come in two years' time should, as the government is predicting, oil prices climb back to over $75 a barrel from the $50 level today. Such a recovery would result in a demand to loosen the reins on spending and that's when real political will is needed.