Alberta government should align spending with dependable sources of revenue

The Smith government currently projects a $2.4 billion budget surplus for Alberta in 2023/24, despite oil prices being lower than originally forecast in Budget 2023. While it looks like good news for now, Albertans should proceed with caution as volatile and unpredictable resource revenue could soon turn the province to a budget deficit.

For perspective, in the past 10 years alone, resource revenue, which includes oil and gas royalties, has been as low as $2.8 billion and accounted for as little as 6.5 per cent of total revenues (2015/16). In contrast, resource revenue has been as high as $25.2 billion and accounted for as much as 33.2 per cent of total revenue (2022/23). It’s easy to see how such large swings in a main source of government revenue could impact the provincial budget.

Relatively high resource revenue was expected to continue in 2023/24, however, in recent months economists warned that commodity prices may be lower than originally projected. In its first quarter update, the provincial government officially reduced its own oil price estimate from US$79 per barrel (WTI) in 2023/24 to US$75 per barrel (WTI). Fortunately, for now, a lower exchange rate, narrower light-heavy oil price differential, and lower natural gas prices (which reduce operator costs) have helped avoid a major decline in overall resource revenue. And the $694 million dollar decline in resource revenue that did occur was more than offset higher personal and corporate income tax revenues. But Alberta may not be so lucky for long.

Here’s the underlying problem: governments in Alberta normally include all resource revenue in the annual budget. When resource revenue is relatively high, the provincial government typically enjoys surpluses and faces pressure to increase spending, but when resource revenues drop, spending remains elevated and the province’s finances turn to deficits. Amid historically high resource revenue, like so many government’s before, the Smith government has given into temptation to increase the spending plan. At current spending levels, if resource revenue falls to its average level over the past 10 years, for example, Alberta’s $2.4 billion budget surplus would immediately flip to a deficit of $6.0 billion.

To avoid the ongoing boom and bust cycle in provincial finances, the Smith government must work to align ongoing spending levels more closely with dependable sources of tax revenue. One way to do this is by introducing a rainy-day account. It would begin by determining a stable amount of resource revenue that could be included in the budget annually, which limits the amount of money available for annual spending.

Put differently, restricting the amount of resource revenue included in the budget tempers the pressure for governments to increase spending during periods of relatively high resource revenue to levels that are unsustainable (without incurring deficits) when resource revenues ultimately decline. Any resource revenue over the stable, pre-determined amount allocated to the budget would be automatically saved in the rainy-day account. And when resource revenue drops below that pre-determined amount, the government can withdraw funds from the rainy-day account to cover the shortfall, thus stabilizing resource revenue—and the provincial finances more broadly--over the longer term.

Despite lower than originally forecast resource revenues, Alberta was able to maintain a budget surplus in the first quarter update. But that doesn’t guarantee surpluses into the future—government action will be needed to stabilize provincial finances in the long term.