China is becoming a key line item in the budgets of Canada’s resource-rich provinces.
From Alberta and Saskatchewan in the West to Quebec in the East, China’s thirst for commodities such as oil, fertilizer and iron ore is no longer just about jobs and economic activity – the gusher of royalties is also helping provinces balance, and even pad, their books.
On Wednesday, Saskatchewan unveiled a budget with a small surplus for 2012-13 thanks to sharply higher oil and potash royalties. Potash will bring in $705-million, up 36 per cent from last year. Oil will generate another $1.6-billion in royalties, up 8 per cent. Saskatchewan now gets nearly 30 per cent of its revenue from various resource royalties.
Quebec Finance Minister Raymond Bachand predicted on Tuesday that royalties from the province’s booming mining industry will grow nearly tenfold over the next decade, putting $4-billion into provincial coffers.
In Alberta, resource royalties represent nearly 40 per cent of revenue and are headed toward 50 per cent. Alberta Finance Minister Ron Liepert predicted a “gusher” of revenue for the province from the oil sands, creating ever-larger surpluses in the years ahead.
But even as provinces increasingly count on rising demand for their resources, economists warn that booms can quickly fade, putting at risk the revenues from high commodity prices and the multibillion-dollar investments in mines and oil sands.
“It’s always a risk when you depend on global markets for anything,” said CIBC World Markets economist Warren Lovely.
History has shown that provinces are also notoriously bad at smoothing out the wild gyrations in the boom-bust resource sector. They often spend based on the expectation of future revenues, without saving enough for rainy days.
“The best thing the provinces can do is treat royalties as an intermittent return on an investment,” said Finn Poschmann, vice-president of research at the C.D. Howe Institute in Toronto. “They should bank the money and use it to fund expenses in the long term.”
He pointed out that Alberta has squandered much of the $10-billion it once had in its Heritage Fund. “It’s used as a piggy-bank to be broken,” he said.
The key, he said, is good governance of those funds and discipline.
In Quebec, new finds of gold, copper, iron ore and diamonds are driving a mining investment renaissance in the province. Investment in the province’s mining industry is expected to reach $4.4-billion this year, up 62 per cent from 2011 – nearly equal to the cash that will go into Quebec manufacturing and half of all mining investment in the country.
Natural resources, including mining royalties, are still a small percentage of total government revenues in Quebec, at roughly 2 per cent. But the share is growing.
“In finance, we usually don’t count our eggs before they’re hatched,” Mr. Bachand said. “Of course, if the hen is there, the eggs are going to be laid tomorrow.”
And the unexpected bonanza, combined with federal compensation for harmonizing its goods and services tax, is enabling the province to put off deeper spending cuts.
Bank of Montreal economist Robert Kavcic said the province’s strategies are fine as long as they are disciplined, and they “put money away in good times to even out the blips.”
He pointed out that Alberta, Saskatchewan and Quebec all have special funds to bank resource revenues.
“It’s the nature of the game in Western Canada,” Mr. Kavcic said. “It’s the way the economies in these provinces operate.”
But CIBC’s Mr. Lovely pointed out that while China’s explosive growth may slow, it’s still going to consume vast quantities of the resources Canada has in abundance.
“It’s still quite supportive of high commodity prices,” he said. “And it’s high enough for major investments to go ahead.”