Alberta Premier Jim Prentice’s musings about imposing a provincial sales tax are looking increasingly politically untenable, even though, as we noted last week, consumption taxes offer many benefits compared to other forms of taxation. Regardless, Alberta’s fiscal situation remains dire.
In part this reflects the impact of sub-$50 oil prices. Instead of the budgetary surplus the Alberta Tories have been promising for years, collapsing energy royalties — on which the province relies for one-fifth of its revenues — mean the government is now staring at a $7-billion shortfall in the next fiscal year.
As Mr. Prentice said last week, “we have lived in a world where we have had high-quality expensive public services, and low taxes, and the two can’t be reconciled when the government oil revenues that it is based upon have collapsed. And I do mean collapsed.”
That much is true. The price of oil has slid from a high of around $100 (U.S.) in August to close at $49 on Wednesday. But back in 2004, when the budget was in surplus and former premier Ralph Klein was triumphantly announcing that “Alberta has slain its debt,” oil was also averaging about $47 a barrel (in 2013 dollars). What has changed since then? In a word, spending.
Indeed, the province has shown a pronounced tendency to spend its oil revenues just as fast — or as slow — as they come in. Between 1993 and 1999, when the Klein government was cutting spending aggressively to balance the budget, oil was selling for less than $30 a barrel (again, in constant, inflation-adjusted dollars). According to calculations by the Fraser Institute’s Mark Milke, Alberta’s per-capita program spending in the fiscal year 1993-94 was $8,978 (in 2013 dollars). By fiscal 1997, per-capita program spending had been reduced to $6,828.
But then, around the middle of the last decade, the price of oil began to climb — from $47 in 2004 to $115 in 2011. Not coincidentally, so did provincial spending. Real per-capita program spending climbed from $8,965 in fiscal 2005 to $10,537 in fiscal 2012. According to the Fraser Institute, had the province merely kept spending increases in line with inflation and population growth since 2004, it would have spent $41 billion less over that time. More to the point, it would have been able to run a surplus throughout the 2008 financial crisis and would be in a much better fiscal position today.
In effect, the Progressive Conservative government took the revenue windfall from higher oil prices and incorporated them into its operating budget. This is akin to someone taking their poker winnings and citing it as their yearly income on a mortgage application. It is no secret that oil is a volatile commodity, whose price can fluctuate wildly from year to year. That is no reason for spending to do likewise.
The other part is keeping a tighter lid on spending, not just now, when the province’s finances are in crisis, but permanently
Although it is not possible to invent a time machine and whip former premiers Ed Stelmach and Alison Redford into being better fiscal managers, it is not too late for Mr. Prentice to put matters right. One part of getting Alberta off its binge-and-bust approach to budgeting is tax reform, placing more of the burden of financing current spending on sales taxes and less on energy royalties. But the other part is keeping a tighter lid on spending, not just now, when the province’s finances are in crisis, but permanently.
History shows Alberta can balance its budget, even when oil is below $50 a barrel. All it takes is a little discipline.