Alberta’s next premier will face big fiscal opportunity

For decades, governments in Alberta have spent most or all resource revenue as it came through the door, which led to a boom/bust cycle where the province enjoys periods of budget surpluses during good times but inevitably suffers deficits when commodity prices decline. With prices booming, Alberta’s next premier will have an extraordinary opportunity to break the cycle and stabilize provincial finances for the long-term.

Indeed, in the past governments have tended to increase spending at the first sight of higher resource revenues.

Consider that at the start of a resource boom, Alberta’s per-person government program spending (adjusted for inflation, excluding interest costs) increased from $8,012 in 1999/00 to $12,740 by 2008/09—nearly 60 per cent. When resource revenue inevitably declined, the province began to incur routine deficits which have persisted nearly uninterrupted (excluding on 2014/15) to today.

While the province is expected to run a surplus this fiscal year, it is largely due to the windfall resource revenue. In other words, the resource revenue roller-coaster is set to continue.

Fortunately, we aren’t doomed to repeat history.

A recent analysis published by the Fraser Institute found that based on current commodity prices and forward markets, revenues could be between $14 billion to $28 billion higher over the next two years. Based on current market prices, this continues to be a reasonable estimate.

If the provincial government can hold the line on spending and instead save these revenues, it would be more than enough additional money to fund a rainy-day account.

How exactly would that work?

The province could model the fund on the previous Alberta Sustainability Fund. While the original fund didn’t last long—it was introduced in 2003 and eliminated by 2013—the logic of the fund was sound; save during good times to provide a stable level of resource revenue during bad times. In other words, funds saved in the ASF would be available to stabilize resource revenue in the budget when it inevitably declines in the future, helping to avoid budget deficits.

The original ASF started with well-intentioned rules that had the potential to help stabilize Alberta’s finances, but it didn’t last because it was based in statutory law and therefore easy for governments to change. This time rules around the fund, such as a set amount of resource revenue that be spent annually (the excess of which would be saved), should be constitutional to ensure they are robust over time.

To accomplish this, the provincial government would first present the idea to the public through a referendum—a procedure that in itself provides value by educating Albertans on the benefits of the fund and garnering public support. Assuming the proposal is passed, the Alberta government would then pass legislation to its effect and present this legislation to the federal House of Commons and Senate for recognition, resulting in a change pertaining to Alberta in the national Constitution.

Alberta is currently experiencing a windfall of resource revenue. If the next premier can avoid repeating past mistakes and instead save for the future, it could avoid more deficits down the road.