Don’t pay off your mortgage when interest rates are low – invest instead.
That’s investment advice lots of Canadians have heard, and some have heeded, in a time of low and now ultra-low interest rates. And that’s also the essence of the financial strategy that Alberta Finance Minister Travis Toews hinted at last week as he projected a slender surplus in fiscal 2022-23 and beyond.
The province is still formulating its plans, but Mr. Toews laid down some markers. The first use of any surplus will be to reduce or eliminate the withdrawal of investment income from the Alberta Heritage Savings Trust Fund. That fund was set up in 1976 by then-premier Peter Lougheed with the aim of turning the physical assets of oil and gas into financial assets, rather than simply spending energy revenues as they rolled in. That vision would have seen Alberta amass a sovereign wealth fund like that of Norway, whose equivalent is currently worth $1.5-trillion.
Of course, Mr. Lougheed’s vision has not panned out. The Heritage Fund still exists, to be sure, but in Alberta’s recent history, governments have not only failed to sock away oil riches, they’ve also plucked the lion’s share of the fund’s earnings for yearly spending. From fiscal 2008 to fiscal 2022, the value of the fund rose by just $2-billion, to $17-billion, with payments made to offset the effects of inflation. Over that same period, a net $21.4-billion in investment earnings from the fund flowed into general revenue.
In the current fiscal year, for instance, the Heritage Fund is slated to pay out $3.2-billion into general revenue. But under the approach articulated by Mr. Toews, the flow of cash out of the fund would slow and then stop as surpluses grow.
After that, the Alberta government isn’t making any firm commitments. But Mr. Toews did say that it would take into account such things as the maturity dates of debt, the cost of capital – and earnings potential. The Finance Minister was not any more specific than that, but he looks to be hinting that the government is open to the idea of diverting some or all of future surpluses into the Heritage Fund even if there is still debt on the books.
That would make sound financial sense if the government was convinced that earnings from a dollar put into the Heritage Fund would be more than the interest paid on a dollar of debt – not unlike a homeowner who puts extra money into equities rather than lump-sum payments on a mortgage. Low interest rates and the province’s strong credit rating tilt that assessment toward investing rather than paying off debt.
If that does turn out to be Alberta’s approach, it will mark a sharp break from the last time the province emerged from a lengthy string of deficits, in the mid-1990s. Then, Alberta had the single-minded aim of paying off its debt, which it did by fiscal 2004. That made for a great headline, but it wasn’t necessarily smart fiscal policy or even good politics in the long term.
The Progressive Conservative government of the day floundered after paying off the debt, seemingly devoid of ideas – beyond cutting a cheque for a few hundred dollars for every adult in the province. Demands to close a supposed “infrastructure deficit” came in fast and furious, and spending took off. The Heritage Fund received some of the overflow (including a move to inflation-offset payments starting in fiscal 2005-06), but it was certainly not the focus.
A decade later, oil prices crashed and the province was once again saddled with enormous deficits. Now, Alberta has been given another oil boom – and another chance to fulfill Mr. Lougheed’s vision.
Responding to news of the projected return of budget surpluses to Alberta, one online reader commented that the province should now halt its transfer payments to other provinces. In one sense, that’s just one more instance of the deep misunderstanding of the federal equalization system, which is nothing more or less than a way for Ottawa to spend federal dollars, paid for by Canadians across the country. And, yes, Alberta residents pay more per capita, reflecting their higher incomes and the progressive nature of the income tax system.
Still, there is a grain of truth in that otherwise erroneous query. Because growth in equalization is tied to increases in nominal gross domestic product, the overall amount of payments has gotten increasingly out of step with the purpose of the program, which is to offset fiscal disparities between the provinces. Those disparities have shrunk in recent years, but the amount of money Ottawa spends on equalization keeps on growing. Alberta’s budget documents point out that an extra $2.1-billion will be paid out in the next fiscal year, beyond what is needed to fulfill the purpose of equalization. Those dollars in theory could be diverted to a program that would benefit Alberta or to cut federal taxes.
But there’s also an irony: The resurgence of Alberta’s energy revenues will almost certainly increase fiscal disparities with other provinces – and whittle down that $2.1-billion in future years.
Subsidy payoffs: Companies that received payments under the Canada Emergency Wage Subsidy program were less likely to shut their doors and shed fewer jobs than firms that did not use the program, concluded a Statistics Canada study released last week. However, that causal relationship was weaker for stronger companies, defined as having higher productivity, higher profitability, lower indebtedness and greater liquidity before the pandemic.
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