Budget 2021: A missed opportunity (again)
Alberta continues to gamble on oil prices, says economist Trevor Tombe
This column is an opinion from Trevor Tombe, an associate professor of economics at the University of Calgary.
During one of the most disruptive economic and fiscal situations in generations, Alberta's latest budget focused on short-term challenges and punted on the long.
It was "focused on what matters most today," said Finance Minister Travis Toews. Unfortunately, there were few indications of what comes next. Aside from the pandemic related items, Budget 2021 largely reflects the same fiscal policy the government set back in 2019.
On the one hand, that's entirely understandable. The pandemic is the government's top priority and, one might argue, it leaves little room to tackle major financial challenges.
But on the other hand, the pandemic is yet another reminder that Alberta is exposed to significant financial risks — largely by choice. Budget 2021 was an opportunity to clearly define the financial challenges and articulate a long-term vision for the province's fiscal future.
It was — and is — a missed opportunity.
Instead of taking lessons from the pandemic and recent oil price declines to start the long process of building a more resilient budget, the government opted to gamble on oil — as Alberta's governments typically do.
What sets Budget 2021 apart, however, is the gamble might — just might — allow the government to balance by 2024 or 2025 without new or higher taxes.
Resource roller coaster ride continues
Alberta's budget needs oil and gas revenues to fund basic public services. It has for generations. Spending levels are historically higher than most other provinces (per person) and tax rates are significantly lower. This choice is very risky.
While the situation changes from one year to the next, Alberta needs roughly one-quarter of the government's funds to come from resource revenues in order to balance its budget. Since 2015, however, we're averaging less than 10 per cent. In 2020, it's even more extreme. Over one-third of revenues must come from resources to balance, but barely 5 per cent actually does.
That massive gap between what we "need" and what we get is wider today than at any other point in history.
Alberta's government remains firmly on the royalty roller coaster — and remains on it by choice. Our governments continue to miss opportunities to think long-term in their budgets because it's so easy to rely on revenues that no individual Albertan pays.
That easy out might also be right around the corner, within a scenario in Budget 2021.
Easy (but irresponsible) path to balance
Budget 2021 features a number of potential future scenarios for oil prices. Its main projection (upon which all the main budget estimates are based) presumes oil prices of $46 per barrel this fiscal year, which then gradually rise to $56.50 per barrel by 2023/24.
What if oil prices exceed these projections? Prices today, after all, well exceed $60 per barrel.
Budget 2021 estimates that if prices average $55.50 per barrel this year and rise to $64.50 within two years then the 2023/24 budget deficit is only $3.4 billion — less than half the nearly $8 billion currently projected.
That creates an interesting opportunity — for whichever party forms government after the 2023 election — to balance the books by 2024 or 2025. Should the UCP win, continued spending restraint for only one additional year would be enough to balance (and perhaps not even that).
To be sure, the potential for a balanced budget only one or two years later than originally planned is not entirely because of oil prices.
The government's spending restraint has contributed in no small part. Overall government spending on programs in 2018/19 was $54.5 billion. Planned spending by 2023/24 is only modestly higher at $55.1 billion. That's a roughly 1.1 per cent increase in spending compared to forecast population growth of 6 per cent and inflation of over 8.5 per cent over the same period.
If spending instead grew with population growth plus inflation (as spending has typically done in recent years in most provinces), the 2023/24 spending level would be nearly $63 billion and the deficit roughly $16 billion instead of the currently projected $8 billion.
Whether one agrees with the spending decisions made by the government or not, it cut the longer-term fiscal challenge roughly in half. This counts as making tough choices. But if oil prices don't outperform expectations, even this won't be enough and higher taxes will be required.
Make better choices
It's easy to see why Alberta's governments persistently use resource revenues to fund public services. Low taxes. High spending. What's not to like? What this view neglects is the risks we face as a consequence.
The longer we wait to wean ourselves off our reliance on resource revenues, the more difficult it will be. Saving more resource revenues rather than spending them — as the late Premier Jim Prentice proposed in his Budget 2015 — would mean Alberta's revenues would be less volatile and our future fiscal risks much lower.
This doesn't mean raising taxes during a pandemic. It doesn't mean raising taxes during the recovery. It means being honest about our fiscal challenge, planning (openly) for more stable sources of revenue, securing more certainty over future public services, and preparing ourselves better for future risks we cannot predict.
At the end of the day, Budget 2021 was an opportunity to consider our longer-term recovery from COVID-19. It was an opportunity to build a more resilient budget. It was an opportunity to transition away from a reliance on risky resource revenues. It was an opportunity to, at the very least, start talking about our province's fiscal future.
But above all, it was an opportunity missed.
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