In turfing a government that has reigned for the better part of two generations, Alberta voters have signalled a taste for radical new thinking to address the provincial government's chronic fiscal addiction to oil. Will premier-designate Rachel Notley pick up that mandate and run with it? That depends on whether she has the nerve to impose a provincial sales tax.
Ousted Premier Jim Prentice was punished, in no small part, for presiding over Alberta's current economic and budget woes – or, rather, for being foolhardy enough to call an election right in the middle of that mess. It doesn't matter that neither Mr. Prentice nor anyone else in Alberta can do anything about the global oil price slump that is causing the province so much misery; the petrobuck, it seems, stops in the premier's office.
If Mr. Prentice had just waited 12 months, he could have looked like a genius. Oil prices are already rebounding significantly, and are about $7 (U.S.) a barrel higher than the Prentice government assumed in its calculations for its recent 2015-2016 budget. Given that every one-dollar change in the oil price translates to an estimated $148-million (Canadian) in government revenue, we're talking about $1-billion of extra cash in provincial coffers if prices were merely to average current levels this fiscal year. If they were to continue to, say, $70 (U.S.) a barrel, that would mean an extra $2.3-billion.
Without doing much of anything other than watch oil prices recover from a multiyear trough, the projected deficit would be shaved roughly in half – and Mr. Prentice would have looked more competent and electable than he did this week.
Still, that solution to the province's fiscal woes is also the root of its problem. Alberta doesn't manage its oil revenues; oil revenues manage Alberta. The provincial budget is chronically over-reliant on boom-and-bust commodity prices that are utterly out of any government's control.
Royalties collected from oil and gas production accounted for nearly 20 per cent of Alberta's budget revenue in 2013-2014. This year, as a result of the global oil price slump, they are expected to make up less than 7 per cent. That kind of hole is very, very hard to fill. And the new NDP government's proposals to date barely scratch the surface.
Ms. Notley's key plan is to raise the province's corporate tax rate, and she certainly has room to do so. At 10 per cent, it's the lowest rate in the country. A back-of-the-envelope calculation suggests that the proposed increase to 12 per cent could raise nearly $1-billion a year in additional revenues. Still, that doesn't even come close to addressing the kind of revenue gaps Alberta faces any time oil prices take even a modest downturn.
Ms. Notley says she plans a "review" of Alberta's oil and gas royalty system. While it's unclear what she has in mind, the early indications suggest the review may be along the lines of finding ways for the government to extract more money for the privilege of exploiting the province's energy resources.
That would not only be a dangerous disincentive for production and investment, it would also miss the point. The problem isn't that Alberta collects too little from energy production, but that it relies on it too much to pay for its day-to-day operations – and saves far too little of its energy wealth.
Alberta should consider adopting – not just year-to-year but over the longer term – a set of conservative, sustainable oil and gas price assumptions for the purposes of its budgeting. Any royalty revenues collected above these targets would go into a savings fund. The fund could serve both as a financial legacy for future generations, and as a rainy-day source to draw upon in rare times of oil price shocks, to stabilize revenues over the short term.
Such a plan would, by design, make a great deal of royalty revenue unavailable for program spending. Either Albertans would have to accept deep and painful cuts in programs (an unpopular option), or the province will need an additional, reliable revenue source to pick up the slack.
Proposing a sales tax has long been considered political suicide in Alberta; it amounts to slaying the province's most sacred of policy cows. Yet it is well-established in other jurisdictions as both a lucrative and remarkably stable source of government revenue. It is the most logical way for the Alberta government to get off the oil roller coaster.
Let's do some hypothetical-policy math. The current level of annual expenditures requires an oil price probably in the ballpark of $80 a barrel. If the province capped the amount of royalty revenues that go toward the budget at, say, $60 a barrel, that might leave a revenue gap of something like $3-billion (based on the revenue sensitivities outlined in the recent Prentice budget). Analysis conducted by tax policy expert Jack Mintz of the University of Calgary a couple of years ago suggests that the province could raise about $3-billion a year with a sales tax of just 3 per cent – which would still be the lowest in the country.
Does Ms. Notley have the nerve to do it? We'll see. But what's clear is that Albertans have voted for change, and that's something they do less lightly or often than anywhere else in the country. If there's ever a time to wean the government off its resource addiction and embrace a sales tax, this is it.