Worried about Alberta’s budget? Stop counting on high resource prices

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Appeared in the Calgary Herald

Forty-one billion dollars. That’s the extra amount, over and above what was needed to keep pace with population growth and inflation between 2006 and 2013, this to fund Alberta government program spending in those years. So the province spent $300 billion in total on operations instead of $259 billion, this because it turned a blind eye to the Leviathan-like increases on the spending side of its ledger.

With oil prices dropping to $69 a barrel, and the recent warning from Alberta premier Jim Prentice and also Finance Minister Robin Campbell that tax hikes are up for discussion—often code for “we want higher taxes”—Albertans should remember that extra $41 billion bill.

No one would deny resource prices and resource revenues matter to the provincial budget. But there are two sides to a ledger—what you collect and what you spend. If you promise too much and spend copiously, you can’t pay the bills.

Some history: On oil, since 2004, spot prices for a barrel of West Texas Intermediate reached US$145.16 in July of 2008 then crashed to $30.28 two days before Christmas that same year. As I write, prices have hit a low of about $69, down from over $100 this past summer.

Meanwhile, the U.S. import price of natural gas ranged from a high of $11.78 per gigajoule in July 2008 to a low of 2.04 in April 2012 with prices in 2014 as high as $8.94 and hovering around four dollars recently.

Over the past decade then, government revenues, tightly linked to as they are to oil and gas prices, imitated resource price fluctuations: soaring, crashing, moderating and then recently weakening once again. Resource revenues accounted for 40 per cent of all revenues to the province in 2005/06 and 19 per cent in 2009/10 (the year after the recession). In other years, proceeds from resources ranged from 24 per cent to 33 per cent of all revenues, and just 20 per cent in 2012/13.

In reflexive response, perhaps in hope resource prices would always stay high, the province increased program spending beyond inflation and population growth—beyond what might be advisably prudent.

In 1993/94, per person program spending was $8,978. Then came the budget cuts and spending reductions of the mid-1990s under then Premier Ralph Klein and Finance Minister Jim Dinning. Those were a distant memory by 2004/05, when per person program spending was $8,965.

Arguments over the “proper” level of spending aside, one unavoidable fact is that after 2004/05—i.e., when per person spending matched early 1990s levels in real terms, spending kept rising to $10,747 by the recession year of 2008/09. In 2012/13, the latest year of available comparable statistics, per person program spending was $10,672—still near the historic high, despite oil and gas prices sitting nowhere near the peak prices of 2008.

These comparisons are derived from program expenditures and are adjusted for inflation and account for population (including population growth). So they are budgetary apple to apple contrasts.

Back to taxes. The notion Albertans need to be taxed more is spurious given the utter lack of attention to provincial spending reform. Past premiers have allowed public sector compensation in Alberta to float at levels 10 per cent above comparable jobs in the private sector—not even counting the cost to taxpayers of an average earlier retirement age in the public service. And just two months ago, Premier Prentice cancelled minor reforms of ever-costlier government and public sector pensions. He did so even though Alberta’s government and public sector pension plan contribution rates doubled in the past decade in some cases, required taxpayer-funded bailouts in others, or both, and thus jacked up pension costs paid for by taxpayers.

As long as the province allows program spending to rise beyond what is reasonable and affordable given the inevitable resource revenue fluctuations, budgetary woes will remain central to the government in Edmonton. But the message from the Premier and Finance Minister to taxpayers is clear: Forget about spending reform, the provincial government prefers tax hikes.

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