Alberta government’s budget promises will fall flat without clear long-term plan

The Smith government released its 2024 budget on Thursday, and while it signalled a new fiscal approach that no longer relies so heavily on volatile resource revenue, Albertans must see real action and commitment over the long term.

For context, resource revenue, which includes oil and gas royalties, skyrocketed from $3.1 billion in 2020/21 to $16.2 billion in 2021/22, which swung Alberta from a period of budget deficits to budget surpluses. In 2022/23, the government enjoyed the highest level of resource revenue on record and relatively high levels have continued in recent years, fuelling surpluses.

But just as resource revenue can unexpectedly skyrocket, it can also unexpectedly plummet because it’s driven by volatile commodity prices and depends on many other factors outside the government’s direct control (including the strength of the Canadian dollar). As a result, relying on resource revenue to balance the budget is a risky way to manage provincial finances.

Indeed, due in large part to a (relatively small) decline in oil prices—West Texas Intermediate is projected to fall from US$76.50 in 2023/24 to US$74.00 in 2024/25—the Alberta government’s total projected revenue ($73.5 billion) in 2024/25 is expected to be $2.1 billion lower than in 2023/24. That’s a huge swing for a province projecting modest surpluses including a $397 million surplus in 2024/25.

According to the Smith government, it’s finally recognized the inherent risk of relying on volatile resource revenue to balance the budget and has committed to spending restraint and saving in the Heritage Fund.

Spending restraint would help more closely align ongoing spending with stable ongoing revenue (rather than temporary windfalls). Though according to budget 2024, total program spending from 2023/24 to 2025/26 will be $6.4 billion higher than projected just three months ago. While on a per-person (inflation-adjusted) basis, program spending will decline modestly year-over-year, the government must further rein in spending and ultimately avoid deficits when relatively high resource revenue inevitably declines.

Saving in the Heritage Fund is also an important step forward because removing a share of resource revenue from the budget can help temper the pressure for governments to increase spending during periods of relatively high resource revenue in the future. It would also transform a share of resource revenue into a financial asset that can accrue earnings over time. This is crucial because Alberta could eventually use annual income from the Heritage Fund to replace volatile resource revenue in the budget if the fund is built up significantly.

However, this will require years of consistent contributions to the fund. For perspective, Alberta’s Heritage Fund will be worth an estimated $23.8 billion in 2024/25 and is projected to deliver just $1.0 billion in investment income. In contrast, annual resource revenue will be a projected $17.3 billion. Put differently, the Heritage Fund’s investment income is currently grossly insufficient to replace resource revenue in the budget.

So, how can the Smith government ensure that successive governments will save money in the Heritage Fund?

Simply put, make a “constitutional” rule. Indeed, it’s possible to change Canada’s Constitution for province-specific measures—in this case, to force Alberta governments to save money in the Heritage Fund.

First, the Alberta government would conduct a referendum in the province asking Albertans if they agree to the new rule. If the majority of Albertans vote in favour of the proposal, the Alberta government would then pass provincial legislation to recognize the new rule 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. To change or ignore this rule, the Alberta government would need to undo each step in this process, which would require another referendum.

The Smith government has made big commitments in budget 2024, but to truly stabilize provincial finances, Albertans need to see real spending restraint and contributions to the Heritage Fund must be maintained over the long term.