Alberta faces future of declining resource revenues and aging population

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Appeared in the Edmonton Sun, March 16, 2022
Alberta faces future of declining resource revenues and aging population

According to the Kenney government’s recent budget, Alberta will run budget surpluses for the next three years—a stark improvement from the sizeable deficits projected just a year ago. While the short-term outlook is brighter, Alberta faces big long-term fiscal challenges that must be addressed to avoid more hardship in the future.

It’s important to understand that much of the improvement in Alberta’s fiscal outlook is due to higher commodity prices, which add up to a lot of additional resource revenue for the budget. Consider that the province moved from a projected $11.0 billion deficit in 2022/23 to a $500 million surplus, with higher resource revenue accounting for $9.1 billion of that improvement.

Here’s the problem. Largely relying on the rebound in resource revenue to balance the budget will only lead to more deficits once commodity prices inevitably decline in the future. In other words, the good times will only last so long as high resource revenues last.

Moreover, there’s a serious risk that resource revenues will permanently decline in the years ahead, an outcome that’s increasingly likely given recent federal regulatory changes. Given that resource revenue has (on average) accounted for roughly 28 per cent of Alberta’s total revenues annually since 1970/71, a permanent decline would leave a big hole in the budget.

An aging population will also compound Alberta’s long-term challenges.

Alberta’s fertility rate—and relatedly, population growth—is expected to decline in coming decades. At the same time, Albertans are living longer. A slower population growth rate coupled with increasing life expectancy means seniors will constitute a greater share of the province’s population in the future.

More specifically, Albertans aged 65 or older accounted for 13.8 per cent of the total provincial population in 2020. According to projections, that proportion will reach 19.0 per cent by 2043. This trend will slow growth in government revenues and drive health-care spending increases.

Indeed, the amount of taxes individuals pay typically peaks during their working years. In Alberta, the working-age (15 to 64) share of the population is projected to decline from 67.6 per cent in 2020 to 64.5 per cent by 2043. Unless there’s a marked increase in senior participation in the workforce, this will likely mean a marked decline in the share of Albertans that are working, driving economic growth and generating tax revenue.

Health-care spending follows almost the exact opposite pattern, skewed towards the first year of life and after retirement. For example, the average annual spending on health care by government on people between the ages of one and 59 is $2,188. This amount almost triples (on average) to $6,424 for Canadians aged 65 to 69. And average per-person spending for those over 70 is $13,797.

Correspondingly, health-care spending in Alberta is projected to increase by approximately 5.6 per cent annually (on average) from now until 2040/41, which will place significant pressure on provincial finances.

So while there’s some good fiscal news for Alberta in the short-term, the Kenney government must make significant policy changes to avoid more red ink in the future.