Alberta and Saskatchewan need new rules to save revenue

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Appeared in the Edmonton Sun, September 29, 2021
Alberta and Saskatchewan need new rules to save revenue

Unfortunately, Albertans are familiar with the resource revenue roller-coaster. During periods of high resource revenue, the government increases spending to unsustainable levels. When resource revenues decline, which they inevitably do, the province incurs budget deficits. This cycle isn’t exclusive to Alberta. Other resource-rich jurisdictions such as Saskatchewan face the same challenge.

According to that province’s recent quarterly update, Saskatchewan’s resource revenue will be roughly $360 million higher than initially projected in 2021/22. To avoid the boom-bust cycle in provincial finances, Saskatchewan should introduce new rules that save a share of resource revenue.

For example, consider Alberta’s erstwhile Sustainability Fund (ASF) introduced in 2003 to “stabilize” a specific amount of resource revenue for the budget with any excess revenue saved, which could then be used when resource revenue fell below the set amount. In other words, save during good times to finance a stable amount of resource revenue in the budget during bad times. The Saskatchewan government itself experimented with a similar fund in 2000.

In both provinces, however, the funds were based in statutory law, which meant their rules were easily changed and the funds were eventually eliminated. The Alberta government eliminated its fund in 2013 after the province’s finances faltered and Edmonton needed more revenue. Saskatchewan’s fund was similarly scrapped in fiscal year 2007/08 and replaced by the so-called Growth and Financial Security Fund, which was itself eliminated in 2016/17.

Nevertheless, the case for a stabilization fund remains strong. If either province creates a new fund, it should learn from past experience and establish the fund as a constitutional requirement, which makes it more difficult to change in the future. In addition, Saskatchewan should impose a rule requiring that a portion of resource revenue be saved in a Heritage Fund. In the 1970s, both Saskatchewan and Alberta introduced Heritage Funds to save a share of resource revenue.

Initially, both funds were subject to rules. In Saskatchewan, all resource revenues were deposited in the fund, up to 80 per cent could be transferred to the budget and up to 20 per cent of the remainder could be used for provincial “development.” That meant nearly all resource revenue could be spent at Regina’s discretion, so the rule was fundamentally flawed when the objective was to save a portion of resource revenue.

After the 1980s oil price collapse, the Saskatchewan government eliminated the rule that limited the share of resource revenue that could be transferred to the budget. By 1992, the fund, which had been drained entirely to finance the deficit, was scrapped.

The Alberta Heritage Fund started with a stricter rule that required 30 per cent of resource revenue be deposited. However, the 30 per cent was statutory law, which again meant that the provincial government could easily change it when times got tough. In 1983/84, the Alberta government reduced contributions to 15 per cent. By 1987/88, the province ended resource revenue contributions entirely.

The history of Heritage Funds in Alberta and Saskatchewan again highlight the importance of making rules constitutional to ensure they are robust over time.

With higher-than-expected resource revenue, Saskatchewan should capitalize on the opportunity to get off the resource revenue roller-coaster by drawing lessons from its past experience and next-door Alberta.