Alberta could get off resource roller coaster with rainy-day account

Despite a projected budget surplus of $2.4 billion in 2023/24, Alberta may soon return to a budget deficit, which would come with big costs for Albertans. Fortunately, the Smith government has the opportunity and ability to avoid it.

Resource revenues (including oil and gas royalties) are volatile, which has created instability in provincial finances for decades. Because the Alberta government normally includes all resource revenue in its annual budget, when resource revenue is relatively high, as it is today, the provincial government enjoys surpluses but faces pressure to increase spending. And when resource revenues inevitably drop, coupled with higher spending levels, the province turns to deficits.

It’s a familiar pattern in Alberta. Most recently, it contributed to a string of budget deficits from 2008/09 to 2020/21 (excluding only 2014/15). Deficits fuel debt accumulation, which Albertans must finance through their taxes. For perspective, after adjusting for inflation, Albertans went from paying $76 per person in provincial net debt interest costs in 2008/09 to $569 per person in 2019/20—even before the onset of COVID.

Unfortunately, the Smith government has repeated past mistakes by increasing the spending plan amid relatively high resource revenue. Indeed, since its 2022 mid-year fiscal update, the Smith government has increased program spending by $10.1 billion.

Again, due to this spending increase, there’s a significant risk that Alberta’s budget surplus could quickly turn into a budget deficit once resource revenues decline. According to the provincial government’s own estimate, a $1 drop in oil prices is equal to a $630 million decline in government revenue. In other words, if oil prices fall by even $4 Alberta could be back in deficit. And considering oil price forecasts have already been reduced this fiscal year—from US$79 per barrel (WTI) to US$75 per barrel (WTI)—that could happen.

So what’s the solution?

Rather than continue riding the resource revenue rollercoaster, the Smith government should use this opportunity to stabilize provincial finances over the long-term by re-introducing the Alberta Sustainability Fund.

The concept is simple—limit resource revenue included in the budget to a stable amount, thereby limiting the amount of money available for annual spending. Any resource revenue above the set stable amount would be automatically saved in this rainy-day account to be withdrawn in years with relatively low resource revenue. Put simply, the fund would help smooth resource revenue over time and avoid future budget deficits.

And it’s more feasible than one might think. In fact, according to a new study published by the Fraser Institute, with some spending restraint, Alberta could save enough resource revenue to fund a rainy-day account worth $9.8 billion by 2025/26—all while maintaining a balanced budget and avoiding a reduction in nominal spending.

There’s still time—Alberta can get off the resource revenue rollercoaster. By limiting spending and stabilizing resource revenue in the budget, a rainy-day account would help avoid future deficits.