HILL: Smith government should resist spending away potential windfall
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The ongoing war in Iran, and disruption of a major energy corridor in the Strait of Hormuz, continues to fuel surging oil prices. While this will improve Alberta’s bottom line in the short term, it will only perpetuate the province’s resource revenue rollercoaster if not properly managed. With a new finance minister, let’s hope the Smith government doesn’t blow this potential windfall.
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Resource revenue — fuelled by oil and gas prices — is inherently volatile. Adjusted for inflation, in recent history, it has been as high as $27.4 billion in 2022/23 (accounting for 33.2% of total revenues) and as low as $3.6 billion in 2015/16 (accounting for just 6.5% of total revenues). In its February budget, released before the Iran war began, the Smith government projected a large $9.4-billion deficit in 2026/27. And $13.2 billion in projected resource revenue, which would account for 17.7% of total revenues in 2026/27. But that number could now surge — and help significantly reduce or even eliminate the deficit. Every $1 change in the West Texas Intermediate price (U.S. dollars per barrel) has a net impact of $680 million on Alberta’s bottom line — the province needs oil prices to average between US$74 to US$77 per barrel to balance the budget this fiscal year. Since the war began, oil prices have frequently exceeded US$100 per barrel.
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Again, in the short term, this will help provincial finances. But if not properly managed, the windfall could set up the government for another debt binge when resource revenues inevitably decline.
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Indeed, during periods of high resource revenue, Alberta governments have a bad habit of increasing spending to levels that become unsustainable without large deficits when resource revenue inevitably falls. And those deficits lead to debt accumulation that comes at a significant cost to taxpayers. This year, the government’s debt interest costs will reach a projected $670 per Albertan.
Planning for lean times
So, how does the province avoid this fate?
Save a set share of resource revenue in the Heritage Fund — Alberta’s long-term resource revenue savings fund — in the good years and the bad. This accomplishes two main objectives. First, it turns a portion of one-time volatile resource revenue into a more stable permanent financial asset. And two, by removing a share of volatile revenue (that in good years, can make the province appear flush with cash) from the annual budget, governments will face less pressure to increase spending during the good times.
Which brings us back to the crux of the issue — spending. This government must make a concerted effort to rein in spending levels, which are already too high, and avoid hiking spending further with this potential windfall. That bad habit has kept Alberta governments on the resource revenue rollercoaster. And the higher spending goes, the further the province (and taxpayers) will fall when prices fall.
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Surging oil prices may help Alberta’s bottom line in the short term, but the province’s next steps will be crucial. The Smith government should save a stable fixed share of resource revenue each year and show some serious discipline with its spending.
Tegan Hill is director of Alberta policy at the Fraser Institute
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