Alberta government’s fiscal update underscores need for rainy-day account

According to the Smith government’s recent fiscal update, the government’s $2.9 billion projected budget surplus has increased to a $4.6 budget surplus in 2024/25 mainly due to higher-than-expected resource revenue. But the resource boom that fuels Alberta’s fiscal fortunes could end at any moment and pile more government debt on the backs of Albertans.

Resource revenue, fuelled by commodity prices (including oil and gas), is inherently volatile. For perspective, in just the last decade, the Alberta government’s annual resource revenue has been as low as $2.8 billion (2015/16) and accounted for just 6.5 per cent of total government revenue. In contrast, according to the Smith government’s fiscal update, projected resource revenue is $20.3 billion this fiscal year and will account for more than a quarter (26.1 per cent) of total government revenue.

But here’s the problem.

Successive Alberta governments—including the Smith government—have included nearly all resource revenue in the budget. In times of relatively high resource revenue, such as we’re currently experiencing, the government typically enjoys surpluses and, flush with cash, increases spending. But when resource revenues decline, the province’s finances turn to deficits.

The last time this happened Alberta ran nearly uninterrupted deficits from 2008/09 to 2020/21 while the province’s net financial position deteriorated by nearly $95 billion. As a result, Albertans went from paying $58 per person on annual provincial government debt interest costs to nearly $600 per person.

So how can the Smith government avoid the same fate as past Alberta governments who wallowed in red ink when the boom-and-bust cycle inevitably turned to bust?

The answer is simple—save during good times to help avoid deficits during bad times. The provincial government should determine a stable amount of resource revenue to be included in the budget annually and deposit any resource revenue above that amount automatically in a rainy-day account to be withdrawn in years when resource revenue falls below that stable amount.

This wouldn’t be Alberta’s first rainy-day account. In fact, the Alberta Sustainability Fund (ASF), established in 2003, was intended to operate this way. A major problem with the ASF, however, was that it was based in statutory law, which meant the Alberta government could unilaterally change the rules governing the fund. Consequently, the stable amount was routinely increased and by 2007 nearly all resource revenue was used for annual spending. The ASF was eventually drained and eliminated entirely in 2013. This time, the government should make the fund’s rules constitutional, which would help ensure it’s sustained over time.

Put simply, funds in a resurrected ASF will provide stability in the future by mitigating the impact of cyclical declines on the budget over the long term.

In the recent fiscal update, the Alberta government continues to risk relying on relatively high resource revenue to balance the budget. To avoid deficits and truly stabilize provincial finances for the future, the Smith government should reintroduce a rainy-day account.