Don’t blame oil prices for Alberta’s deficit

Alberta’s budget, to be unveiled on Oct. 27, will contain the province’s seventh deficit in the last eight years, most recently projected at $5.9 billion. A popular narrative blames declining oil prices for the government’s deteriorating financial situation. However, as a recent Fraser Institute study found, Alberta’s fiscal woes are primarily driven by successive governments not controlling the rapid growth in spending over the past decade. For further evidence of the tenuous link between Alberta’s budget balance and the price of oil, consider the following analysis.

The accompanying chart displays the province’s surplus or deficit as a share of GDP from fiscal years 1990/91 to 2015/16. There are three distinct periods worth noting. From 1990/91 to 1993/94, Alberta recorded four consecutive large deficits. After implementing a series of fiscal reforms, the provincial government was able to run surpluses in 14 consecutive years starting in 1994/95 up to 2007/08. Since then, the province has been in deficit with the exception of a small operating surplus in 2014/15.

If the narrative about oil prices driving deficits was true, we would expect the province to run deficits in years with relatively low oil prices and surpluses in years with relatively high oil prices. But that relationship simply does not hold.

The chart also displays the annual average West Texas Intermediate (WTI) spot price for a barrel of oil from 1990 to 2015. The prices are adjusted for inflation into 2015 U.S. dollars. Interestingly, Alberta has run surpluses when oil was close to $20 per barrel (in 2015 USD) and has run deficits when oil reached nearly $110 per barrel (in 2015 USD).

To further illustrate the lack of a relationship between oil prices and Alberta’s fiscal balance, consider the averages over the three periods delineated above.

From 1990/91 to 1993/94, Alberta ran deficits averaging -3.0 per cent of GDP while the price of oil averaged approximately $37 per barrel (in 2015 USD). In the next major period from 1994/95 to 2007/08, Alberta recorded surpluses averaging +2.2 per cent of GDP with oil at an average of roughly $43 per barrel (in 2015 USD). In the final period from 2008/09 to 2015/16, the province averaged a deficit of -0.5 per cent of GDP, despite oil prices averaging a whopping $88 per barrel (in 2015 USD).

All this suggests that oil prices alone are not a good predictor of Alberta’s fiscal balance. The province has been able to balance its books in times when oil prices (after adjusting for inflation) were lower than what they are today.

While oil prices are currently below their historic highs, the core problem is that successive governments spent as though high resource prices (and thus revenues) would last forever. Between 2004/05 and 2014/15, the provincial government increased program spending by 98.3 per cent—nearly double the growth rate necessary to keep pace with increasing overall prices (inflation) and a growing population, which collectively grew by 52.1 per cent over the period. Program spending also outpaced the rate of provincial economic growth (88.6 per cent).

Had governments restrained spending growth since 2004/05 to the rate of inflation plus population growth, Alberta could expect a $4.4 billion surplus this year rather than a $5.9 billion deficit. That’s a $10.3 billion difference.

Put simply, Alberta’s deficit is mainly due to past spending choices, not declining oil prices. The key lesson for governments is to spend prudently in good times in order to be prepared for the bad times.