Addicted to Oil Revenue

The Alberta Government plans to table its 2009-2010 budget on April 7. Already it has prepped citizens for the prospect of budget deficits with its third-quarter update in late February, variously blaming the Heritage Fund’s investment losses and the general economic malaise. “We are just like any other government,” the update’s presser states. But there’s one made-in-Alberta problem here.

In the past I’ve railed against the government’s creeping reliance on resource revenues to fund basic government services. Even if you strip out the surplus, personal income and business taxes and other non-energy items covered just 80% of government expenditures in 2007-08, with oil and gas royalties and land sales making up the balance, and more.

Brace yourself, then, for the incoming era of deficit spending, when not only will business and income taxes decline at the margins, but resource revenue will fall precipitously. This will happen, I daresay, in a manner more dramatic than in the 1980s when Alberta was still Canada’s unchallenged home of (mostly conventional) oil and gas production. Today most of our oil comes from the oilsands, whose break-even point is above today’s market price, for one thing. And as for natural gas, Alberta activity – both conventional and unconventional – is being undercut by the unlocking of massive shale gas reserves in the United States and British Columbia (more on that in our upcoming April issue).

At that, the B.C. government is predicting a 27% decrease in natural gas revenue in 2009-10 from the current fiscal year. The dropoff in gas revenue, which provided $5.2 billion to the Alberta treasury last year, will be more severe here. By the same token, B.C. is budgeting for a 25% shortfall in corporate profits; in most of the oilpatch there will be no profits in 2009-10.

You’d think we would have learned this lesson by now, but the Alberta government now spends some 20% more per capita than the next most profligate province. We simply wouldn’t be able to do this without resource revenue; indeed it makes it harder for other provinces to keep their spending in check when Alberta is setting the public-sector pay benchmarks, and this “Dutch disease” infects all of Canada.

Three years ago, at the height of the boom, government finance adviser and University of Alberta professor Paul Boothe predicted that we would go into deficit around now. (Alas, Boothe is on secondment out of province right now and is not in a position to comment on the province’s finances.) We have to look at resource revenue as a fickle, one-time capital gain, to be invested for the future. Not 30%, as Peter Lougheed targeted, but all of it, Norway-style. Pay for basic government services out of the tax and other revenue that keeps flowing regardless of where you are in the energy or business cycle, and will keep flowing after the oil and gas reserves are gone or no longer needed.

Then we would not have to go through the wrenching period of fiscal restraint that is to come.

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