Alberta government buys another ticket for the resource revenue roller-coaster

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Appeared in the Financial Post, March 23, 2018

Before forming government, Rachel Notley and Alberta’s NDP vowed to get the province “off of the resource revenue roller-coaster.”

So it’s ironic that now-Premier Notley’s third budget promises to take the province on yet another ride, as her government’s vague and risky “path to budget balance” relies on future growth in natural resource revenue to hopefully eliminate Alberta’s deficit many years from now.

In 2014, when oil prices collapsed, Notley, then leader of the opposition NDP, had little sympathy for premier Jim Prentice’s predicament. “The PCs claim it’s a crisis every time the price of oil drops,” she stated while criticizing the government for “riding this revenue roller-coaster for years.”

The term “revenue rollercoaster” refers to Alberta’s reliance on resource revenues to fund programs. When resource prices are high, money pours in and governments spend freely. When resource revenues fall, big deficits tend to emerge.

In some respects, Notley’s 2014 statement was bang on. In the decade prior to the oil price collapse, successive PC governments spent as though good times would never end. When bad times arrived and revenue fell, the government predictably faced a significant shortfall. Clearly, if previous PC governments exercised greater spending discipline, the deficits of recent years would have been much smaller.

Now, as Alberta recovers from the recession, Rachel Notley is premier and calls the shots about how to deal with the deficit. And in her third budget, she has offered a simple plan: buy another ticket on the revenue roller-coaster she once decried and hope for royalty revenue growth to take care of the problem.

The numbers tell the story. The budget projects Alberta’s operating deficit this year will be $8.8 billion. Thanks to recent spending increases, this is only slightly down from the peak of $10.8 billion in 2016-17.

The government’s complacency about the province’s large deficits going forward is remarkable, as the budget includes almost no progress in its three-year detailed fiscal plan. In 2020/21, the deficit will still be almost $7.0 billion.

After 2020/21, the detailed fiscal plan ends and what’s left is a vague “path to balance” showing that at that point the deficit starts to shrink much more quickly before disappearing completely in 2023/24.

So how exactly does the government think it will be able to make so much progress on the deficit later given it is making so little progress today? The answer, unfortunately, is that the government is simply hoping for natural resource revenues to grow quickly in its “path to balance” and take care of the deficit for them.

Consider that between 2018/19 and 2023/24, the government projects resource revenues will increase by $6.6 billion—this accounts for three quarters of the $8.8 billion deficit the government has to eliminate. In other words, the government’s “plan” is essentially to cross its fingers and hope for more resource royalties.

Let’s look at it another way. The budget forecasts natural resource revenues in 2023/24 will represent 16 per cent of all provincial revenues. This compares to 18 per cent in 2014/15, the year before the effects of falling oil prices were fully felt. So the government’s plan to balance the budget explicitly requires riding the once-derided revenue rollercoaster back to nearly the same height as before the recent fall.

This means if resource revenues don’t increase quickly, big deficits will persist. The reason for this is that after three years in power, the Notley government has shown no appetite to address the root cause of Alberta’s troubles—government spending.

Despite dire fiscal circumstances, total spending has grown under the Notley government by 14.5 per cent between 2015/16 and 2018/19. The government projects slower spending growth going forward, but this budget makes no serious effort to reform spending or rollback recent increases. Instead, the plan is to merely slow down the rate of growth and, again, hope for resource royalties to do the heavy lifting.

Rachel Notley blasted her predecessors for riding the “resource roller-coaster.” Her government, however, has failed to put the province on a safer fiscal trajectory. This latest budget confirms the Notley government’s deficit-reduction strategy is simple—buy another ticket and hang on for the ride.

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