Alberta needs robust fiscal rules that survive tough times

After nearly a decade and a half of budget deficits, Alberta’s provincial finances are once again in serious trouble. In the past, the province experimented with various rules intended to impose fiscal discipline on governments, which could have helped mitigate today’s fiscal woes. Unfortunately, these rules were easily and quickly disregarded the moment that times got tough. Put simply, Alberta needs fiscal rules that will survive the hard times.

Consider the government’s numerous attempts to impose fiscal rules to better manage volatile resource revenue in the budget, which is a major contributor to Alberta’s deficits.

In 1976/77, for instance, the Lougheed government required that 30 per cent of resource revenue be deposited in the fledgling Heritage Fund. The fund had the potential to guide governments to spend more sustainably (and avoid large deficits) by removing a share of resource revenue from the budget. However, the 30 per cent contribution rate was statutory law, which meant that the provincial government (specifically, the Alberta legislature) could unilaterally change the rule when times got tough, and it did.

Following an oil price collapse in 1982/83, the government reduced contributions to 15 per cent. Following a second oil price collapse in 1986/87, the province ended resource revenue contributions entirely. As a result, all resource revenue is included in the budget and continues to instill volatility in provincial finances.

The Alberta Sustainability Fund (ASF) was another attempt to use statutory rules to help Alberta’s finances. Established in 2003, the fund was meant to “stabilize” a specific amount of resource revenue for the budget, with any excess money saved in the ASF to be withdrawn when resource revenue fell below the stabilized amount. The logic was simple—save during good times to provide a stable level of resource revenue during bad times.

However, following the 2008 financial crisis and associated fiscal challenges, governments disregarded the fiscal rule, drained the fund entirely to support the budget and the ASF was officially eliminated in 2013.

Both the Heritage Fund and ASF started with well-intentioned rules, which had the potential to help stabilize Alberta’s finances. But in both cases, the fiscal rules didn’t last because they were statutory in nature and therefore easy for governments to change.

So what’s the solution?

To ensure fiscal rules are robust over time, they should be constitutional. To achieve this, Alberta would first present the ideas to the public through a referendum—a procedure that in itself provides value by educating Albertans on the benefits of the given rule and garnering public support. Assuming the proposal is passed, the Alberta government would then pass legislation to recognize the rules 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.

After that, if a future Alberta government wanted to reverse the rule or ignore its requirements, it would need to reverse each step in this process. Specifically, it would have to seek approval through a referendum, pass provincial legislation, and request the federal government approve similar legislation.

For fiscal rules to be effective, they must be durable over time. By making fiscal rules constitutional in nature, governments can protect them from being easily ignored, disregarded or outright eliminated in the future.