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resource revenues

With the price of oil plummeting from more than $90 (U.S.) to less than $50 over the past four months, the Alberta government is suddenly looking at a $6-billion drop in non-renewable resource revenues (NRRR). The consequences seem bleak: a return to either Getty-era deficits, Klein-era budget cuts or some equally unpleasant combination of both. Most Albertans seem surprised by these events. The implicit, if unspoken, assumption is that until the recent price collapse, everything was just fine.

In fact, nothing could be further from the truth. Government budgeting in Alberta has been an accident-waiting-to-happen ever since then-premier Don Getty stopped depositing 15 per cent of NRRR into the Heritage Savings Fund in 1987. Since then, the government has been dumping every penny of NRRR into general revenue, thereby subjecting Alberta's annual budgets to the inherent volatility of oil prices.

The cyclical collapse of oil prices is as predictable as death. We all know we are going to die. The only surprise is when. And with oil, even that is not very surprising anymore, as it has happened every decade since 1986 – in 1998, 2008 and now again in 2014-15.

So neither the government nor the PC leadership can credibly claim to have been surprised by the events of the past four months.

They have been warned repeatedly that to avoid the boom/bust cycles of oil and gas, they had to recommit to the fiscal discipline originally put in place by Peter Lougheed in 1976. That policy required the Government to deposit 30 per cent of NRRR into the Heritage Fund, and only use the interest earned by the fund to help pay for annual budgets.

These warnings have been conveniently ignored by every Alberta premier since Mr. Lougheed. Why save for the long term when you can spend for the short term, especially when there is an election looming? The short-term political self-interest of the government of the day has trumped the longer-term public interest. And it will continue to do so, unless some new constitutional rules are put in place.

Which brings us to the very tough decisions facing Alberta's new Premier, Jim Prentice. While he certainly bears no responsibility for this legacy of fiscal mismanagement – he was in Ottawa for most of it – it falls on his shoulders to deal with its consequences.

No doubt he spent the holidays feeling like Scrooge, while he tries to figure out what combination of spending cuts and revenue enhancements can reduce looming budget deficits. To curb spending will require significant public-sector wage restraint, perhaps even another Klein-era 5-per-cent-wage rollback for the entire public sector. But even this would only save about $1.5-billion. Even less can be saved by postponing the construction of much needed new schools, roads and hospitals. Where's the rest going to come from?

To increase revenues, Mr. Prentice can nibble around the edges with options such as bringing back health-care premiums and increasing the various fees that Albertans pay for government services. But any serious new revenue will have to come from tax increases: either corporate income tax (CIT); personal income tax (PIT); or a new provincial sales tax (PST). I will not repeat the well-documented advice that the Premier has already been given that from an efficiency and productivity perspective, a PST beats both the CIT and PIT hands down.

The only novel advice that I would give the Premier is that this fiscal crisis is too good to waste. Do something that no premier has had the courage to do since Ralph Klein: Tell Albertans the truth about our public finances. Start the process of weaning the annual budgeting process off of energy revenues.

Resurrect the Lougheed policy of legally mandating that a set percentage of NRRR must be deposited in the Heritage Fund each year. But this time make it a constitutional rule – a rule that cannot be amended or repealed by a simple majority vote (a la Mr. Getty, Ed Stelmach and Alison Redford) every time it becomes inconvenient. Make it politician-proof. The models of success are out there – Norway and Alaska – to be adopted by and adapted to Alberta.

No matter what combination of budget cuts and revenue increases Mr. Prentice comes up with to get through the current fiscal crisis, without this fundamental reform, Alberta will be condemned to the same guaranteed-to-fail policy of the past 28 years. But if he puts a constitutional ring-fence around the annual contribution rule, Mr. Prentice can be remembered as the premier who completed the project that Mr. Lougheed started.

Ted Morton is a senior fellow at the School of Public Policy at the University of Calgary and the Manning Foundation for Building Democracy. He previously served as the PC MLA for Foothills-Rocky View and was Alberta's minister of finance in 2010.