Alberta government clings to resource revenue rollercoaster

According to last week’s fiscal update, the Smith government will run a $2.9 billion budget surplus this fiscal year up from the $367 million surplus the government projected in February. Finance Minister Nate Horner said it’s an accounting surplus, rather than a cash surplus, which means the government must still borrow hundreds of millions of dollars this year. He emphasized that “we can’t spend beyond our means today” yet this government continues to spend historically high (but volatile and unpredictable) resource revenue, which has led to deficits often in the past.

Over the last 10 years, resource revenue has been as low at $2.8 billion in 2015/16 and as high as $25.2 billion in 2023/24. It will reach a projected $19.8 billion this fiscal year. Put simply, Alberta is currently enjoying historically high resource revenue.

But the fiscal picture isn’t as rosy at it first appears. Alberta has a long history of enjoying budget surpluses when resource revenue is historically high, but inevitably falls back into deficits when resource revenue declines because governments increase spending during good times but fail to rein in spending during the bad.

Indeed, a $1 increase in resource revenue (adjusted for inflation, on a per-person basis) is associated with a 56-cent increase in program spending the following fiscal year, but a decline in resource revenue is not similarly associated with a reduction in program spending. Consequently, spending levels often significantly exceed stable ongoing revenue.

This pattern contributed to a string of nearly uninterrupted deficits from 2008/09 to 2020/21. And Alberta moved from a net financial asset position (meaning it had more money in assets such as the Heritage Fund than it carried in debt) to a net debt position of $59.8 billion by 2020/21. Overall, Alberta’s net financial position deteriorated by $94.9 billion over the period. And ultimately, taxpayers must finance government debt. Albertans went from paying approximately $58 per person on provincial debt interest costs in 2008/09 to $564 in 2020/21.

And yet, while this pattern of high spending and deficits is well known, the Smith government continues to use historically high resource revenue to finance high spending. Indeed, if resource revenue fell to its average over the past two decades, the province would immediately fall into deficit.

How does the government avoid this fate? It must meaningfully reduce spending.

And there are plenty of ways to reduce spending. For instance, the province spends billions of dollars in subsidies (a.k.a. corporate welfare) to select industries and businesses every year despite a significant body of research that shows these subsidies fail to generate widespread economic benefit. Eliminating these subsidies would deliver significant savings.

Moreover, government-sector workers in Alberta (federal, provincial and local) enjoyed a 5.6 per cent wage premium (on average) over their private-sector counterparts in 2021, the latest year of available comparable data (after controlling for factors such as age, education and occupation). By bringing government-sector worker compensation in line with the private sector, the Smith government could save taxpayer money.

The number of public-sector employees has also grown by 53,900 people from February 2020 to February 2024. The government can reduce this number back to pre-pandemic levels through attrition and a program review.

Alberta’s projected budget surplus will only last as long as resource revenues remain high. To avoid the boom-and-bust cycle that’s plagued Alberta in the past, the Smith government must meaningfully reduce spending.