Alberta needs new (old) rule to stabilize government resource revenues

The Alberta government once again faces budget deficits and mounting debt, which started well before COVID, due in part to the treatment of non-renewable resource revenue in the budget. With an expected rebound in the energy sector, now is the time to introduce new rules to stabilize this volatile source of revenue and prevent the ongoing boom-and-bust cycle in provincial finances.

Since 1970/71, Alberta’s non-renewable resource revenue (hereafter referred to simply as resource revenue), adjusted for inflation, has ranged from a low of $1.6 billion (1970/71) to a high of $19.0 billion (2005/06). As a share of provincial revenue, it’s ranged from 77.4 per cent (1979/80) to a projected 4.7 per cent in 2020/21.

This volatility creates a problem, when during times of high resource revenue, governments increase spending to levels that are unsustainable once resource revenue inevitably declines—which produces periods of routine deficits.

Consider this. Alberta’s per-person spending (adjusted for inflation, excluding debt interest costs) increased from $8,012 in 1999/00, when resource revenue began increasing, to $12,740 by 2008/09. Once resource revenue declined, the province had to borrow money (i.e. incur deficits) to pay for spending that could only be sustained without deficits when resource revenues were high.

To prevent this boom-bust cycle in government finances and restore discipline to government spending, the Kenney government can revisit some old rules. First, Alberta should reinstitute the Alberta Sustainability Fund (ASF).

Established in 2003, the fund’s main idea was to “stabilize” a specific amount of resource revenue for the budget with any excess money saved in the ASF, which could be withdrawn when resource revenue fell below the stabilized amount. In other words, save during good times to finance a stabilized amount of resource revenue in the budget during bad times.

The ASF, however, was based in statutory law, which meant its rules were easily changed and the fund was discarded entirely in 2013. If the government creates a new sustainability fund, it should learn from this lesson and establish the fund as a “constitutional rule,” which would make it more difficult to change in the future.

Second, Alberta should impose a fiscal rule requiring that a portion of resource revenue be deposited in the Heritage Fund. This would help temper the pressure for governments to increase spending during times of high resource revenue.

When the province created the Heritage Fund in 1976, it imposed a rule that 30 per cent of resource revenue be saved. Critically, though, this requirement was also statutory so it could be easily changed. When resource revenues declined in 1982, the province lowered the contribution rate to 15 per cent and then ceased contributions entirely in 1987 following an oil price collapse.

Finally, Alaska’s experience with its Permanent Fund, also established in 1976, provides some important insights for Alberta. Alaska requires at least 25 per cent of mineral revenues to be deposited—but its requirement is constitutional, which makes it more difficult to change. If Alberta had followed rules similar to those used in Alaska, the Heritage Fund would have a balance of approximately $91.6 billion instead of the actual $16.2 billion (2019/20).

Alberta needs a new approach to resource revenue. A combination of constitutional rules, which would establish a predictable level of resource revenue for the budget, and a requirement that a share of resource revenue be saved, would help end the recurring boom-and-bust cycle in Alberta.