Alberta has been here before. And not that long ago.
But the latest collapse in oil prices could certainly not have come at a worse time for the province’s economy, which has been in stagnation since the last crude crash five years ago. It was just showing signs of modest growth.
It’s impossible to say what fate awaits Albertans this time. Premier Jason Kenney said on Monday that the province is in uncharted territory. The combination of a global energy slowdown as a result of the coronavirus, combined with the bizarre decision by Saudi Arabia to flood the market with oil at the same time, has led to a price decline not seen in ages.
No one is sure where things go from here.
Unfortunately, governments in Alberta have rarely learned from these events in the past. Instead, they have plodded along the same path afterward, plundering their oil riches until the next great fall. Sadly, they are likely to do the same thing again this time, racking up debt to unheard-of levels in the process.
University of Calgary economist Trevor Tombe did some ballpark estimates on provincial deficits over the next few years given current prices – on Monday, West Texas oil closed at US$27 a barrel below the government’s US$58-a-barrel forecast in this year’s budget. (It’s estimated that for every one dollar drop in the price of oil below government estimates, roughly $355-million gets extracted from the provincial treasury.) Mr. Tombe estimated a deficit of between $11-billion and $12-billion this year, another $8-billion to $9-billion the next and up to $4-billion the year after that. It would put the province’s overall debt at well past $100-billion.
Mr. Kenney is convening an advisory panel chaired by economist Jack Mintz to help chart a course of action. Unfortunately, the Premier has already ruled out a sales tax.
Now is precisely the time to ask people in the province to make the kind of “sacrifice” they should have been making for years. A modest two per cent sales tax would hardly impose an impossible burden on Albertans, while helping alleviate some of the damage that the price collapse is imposing on the province.
More importantly, it would condition people there to the idea of a tax that the rest of us pay every day.
Economists have been saying for decades now that the province’s books should never completely depend on revenues from something as unpredictable as oil. At best, the government should count on a small fraction of those annual revenues that it could certainly rely on, and put the rest in a “rainy day” fund for occasions precisely like the one in which we are currently.
The same economists have also been saying that the province needs a reliable source of income to help during these inevitable downturns. As it’s been pointed out here before many times, a sales tax of five per cent – which would be the lowest among the provinces in the country – would have helped eliminate several of the deficits the province has incurred over the last several years. But no, governments have come to believe the adage that PST stands for Political Suicide Tax.
At some point, the compassion one has for a province down on its luck has limits. If Alberta does not want to do anything to help itself out of these messes when they invariably arrive, then you can’t feel too badly for them. It’s like a child that won’t listen. Eventually, you have to let them sort out these problems for themselves. That’s the only way they will learn.
In the case of Alberta, governments have always relied on the markets eventually returning to their old selves, and oil royalties returning the provincial coffers to overflowing. Well, there are new winds blowing in the energy sector that suggest those days may be gone for good.
Alberta does have the capacity to add more debt to its books without upsetting bond rating agencies too much. But like a snowfall that is left unattended, it just makes it that much harder to dig out from under.
They say that a crisis is a terrible thing to waste. Unfortunately, Alberta has wasted them before. Premier Kenney has an opportunity to make sure that doesn’t happen this time around.
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