Jesse Kline: Alberta’s oil revenues challenge

In its first Speech from the Throne since Jim Prentice took the helm as Premier of Alberta, his government stated that “a budget tied to volatile energy prices imperils our fiscal resilience over the long term.” As such, the government says it “must align spending with a realistic assessment of the financial capacity we can sustain responsibly, without risking the prosperity of our children and grandchildren.”

In stating his intention to reduce Alberta’s dependence on oil revenues, Mr. Prentice has joined virtually every premier since Peter Lougheed swept into office in 1971. As far back as 1974, Mr. Lougheed told the Calgary Chamber of Commerce that the province had 10 years to wean itself off natural resource revenues. But that timeline got stretched out, as the extent of the province’s oil reserves became clear.

Today, resource revenues still account for about 25% of the provincial budget, which makes it very hard to create accurate economic forecasts and set spending priorities for the future. There’s no question that Alberta would be better off if it had a hedge against volatile oil prices, which have decreased from $99 earlier this year to around $75 today.

The question is: How does Mr. Prentice plan to increase revenue from other sources, especially considering that he has already pledged to maintain “low taxes and no sales tax”? The NDP would like to see an increase in income taxes and an end to Alberta’s flat tax. This would destroy whatever is left of the Alberta Advantage.

A much better solution would be to follow the lead of other jurisdictions and put some resource revenues aside to make up for any budgetary shortfalls caused by decreases in oil prices. Unfortunately, Alberta has done an abysmal job of managing its Heritage Trust Fund, which was designed to be used for this purpose.

It seems doubtful that Mr. Prentice could maintain current spending levels and wean the treasury off its addiction to oil revenues without significantly raising taxes. This would be the wrong way to go. Instead, the new premier should find a way to bring spending under control. If the province can reduce its expenditures and avoid the temptation to increase spending — in good times and bad — it will be able to maintain its competitive tax environment, and eventually start putting money away for the future.

National Post

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