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Editorials Rachel Notley’s first year was easy, compared to what comes next

Alberta Premier Rachel Notley gives an update on the wildfire situation currently underway in and around Fort McMurray on Wednesday, May 4, 2016. THE CANADIAN PRESS/Codie McLachlan

CODIE MCLACHLAN/THE CANADIAN PRESS

Premier Rachel Notley's New Democratic Party was elected one year ago this week. It's mostly been a solid, serious first year, particularly given that her party had never before been anywhere near the levers of power. She took steps to tackle climate change, introducing some of Canada's toughest carbon-pricing rules. She pushed hard for the rest of the country to accept new pipelines, which are necessary for the oil industry to operate efficiently. She brought in a promised, badly needed reform of Alberta's political fundraising rules. She wisely reconsidered raising oil royalty rates, faced with evidence that it would be counterproductive. She's faced the Fort McMurray disaster with intelligence and empathy.

And yet Ms. Notley and her party have only begun to scratch the surface of Alberta's long-term challenges. Her predecessors squandered the boom times, and handed her the keys to the car just as it was running out of gas.

The NDP inherited a massive hole in the province's finances, which has since grown. Its cause is what used to be the province's advantage: Oil. Thanks to oil, previous Alberta governments delivered the impossible, year after year: low taxes and high spending. And then the bottom dropped out on oil prices. Without its annual lottery winnings, Alberta was revealed as a budgetary basket case.

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In 2014-15, Alberta's non-renewable resource revenue was $8.9-billion – or 18 per cent of the provincial budget. This year, the province expects to collect just $1.4-billion. Combined with a downturn in the rest of the economy, the result is this year's expected budget deficit of $10.4-billion. The province hopes royalty revenues will double next year, and then nearly double again the following year. But whether Alberta is run by NDPers, Progressive Conservatives or Wildrose, the world price of oil is out of the province's hands.

And even if oil prices rebound somewhat, as hoped, the NDP is forecasting a deficit of more than $10-billion next year, $8.4-billion the following year, and no balanced budget until (maybe) 2023.

The good news is, Alberta doesn't have to be in a hurry to get to a balanced budget. But more than any other province, except perhaps the similarly resource-dependent Newfoundland and Labrador, it needs a credible plan to get there, eventually. And right now, Alberta's plan is still based too much on hope and oil. It is still counting on lottery winnings to pay for the groceries.

Alberta starts off in a better fiscal position than any other province – it has no net debt. Running a deficit, even this year's remarkably large one, will not spark a fiscal crisis.

But it can't do that forever. Because while Alberta's fiscal starting point may be solid, its fiscal direction is worse than any other province, save Newfoundland. Most provinces have debt levels that are stable or falling. Alberta's debt, though starting from a very low level, is exploding. The province is going to have to make some hard choices around controlling spending or raising taxes, because its traditional oil-revenue stream faces three massive challenges – all of which are beyond Alberta's control.

First, oil prices are at half the levels of a couple of years ago, and no one can say when or to what degree they will bounce back. The world market sets a price, and that's what Alberta gets – minus possible discounts due to lack of pipeline capacity.

Second, there's the fight against global warming. Nobody wants to say this too loudly, but if the countries of the world follow through on their carbon-reduction promises, much of the planet's oil will be staying in the ground – since if humanity extracts and burns all the oil it can, it will destroy the planet. That means there's a good chance that some significant part of Alberta's oil reserves won't ever generate energy – or income. This isn't an immediate issue, but it's likely to become a big one in the decades to come.

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Third, oil is a non-renewable resource. Factories don't get used up; farms don't just produce for a season. But a barrel of oil earns money once, and then it's gone. That's why smart oil producers save some of their royalties, investing for future generations.

Norway has roughly the same population as Alberta, and for decades it's been socking away some of its petro-windfall in an investment fund, now worth more than $1-trillion. Alberta started down that path a generation ago – but abandoned it, because saving for tomorrow means spending less today, and no Alberta government was willing to make that sacrifice. Alberta's Heritage Savings Trust Fund is worth less than $20-billion, and will soon be dwarfed by the province's debts.

A little over a year ago, then-premier Jim Prentice laid out a plan to gradually stop spending all of Alberta's royalties, and to start saving like Norway. His electoral defeat, combined with the collapse in oil prices, has seen such ideas pushed aside.

But in the long run, Alberta has to start handling its oil wealth more like Norway. As with global warming, this isn't an issue that will be tackled this year or next. But for the sake of future generations, Alberta has to do it eventually. And that means, in the long run, Alberta doesn't just have to balance its budget. Unlike most other provinces or the federal government, which can comfortably run small deficits forever, Alberta has to eventually start running surpluses, in order to save some of its resource revenues.

This wasn't what the NDP spent decades trying to get elected for. Who wants to promise voters that their government will tax them more while giving them less? But it's hard to see how Alberta, which turned itself into Canada's low-tax, high-spending capital of budgetary hypocrisy, can do otherwise.

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