Alberta’s “oil jackpot is not all joy,” observed journalist David Ablett in January 1974. The “roller coaster ride of the next few years,” he continued, “is going to be a doozer.”
This was perhaps the first time Alberta’s budget was said to be on a roller coaster ride, but it was hardly the last. Successive governments have grappled with the issue over the past half century, but concrete measures to finally fix our budget problem were either short lived or met with failure.
Premier Jim Prentice was the most recent to try. Speaking to Albertans in a televised address before tabling his first budget in 2015, the premier warned that Alberta was “at a turning point.” Oil prices had fallen roughly by half from their $100 per barrel average in recent years. As a result, his first budget—and a pre-election one at that—anticipated a significant multi-billion-dollar hit. He proposed some tough fiscal medicine to, as he put it, “get our program expenditures off the energy revenue roller coaster and make our revenues more secure.”
Tax increases, spending cuts and saving more resource revenues were all on the table. But it didn’t work out. Prentice lost the election, and his successors have since ignored the problem and hoped oil prices would rise to save the day.
Alberta has long relied on revenues from oil and gas production to fund public services. This has some benefits, of course. Who likes paying taxes? But this reliance comes with considerable risks. The province swings from massive deficits when energy prices slump to sizeable surpluses when they rally. No other province comes close to matching Alberta’s fiscal volatility. And the failure to save more resource revenues depletes our wealth and costs future generations dearly.
Resource revenues create problems not only for our finances but also for our politics. We saw this in the 2023 provincial election. It was the closest in Alberta’s history, with barely over 2,700 votes separating the two parties in the half-dozen seats that decided the outcome. For some voters the recent surpluses under the UCP contrasted favourably with the large deficits incurred during premier Rachel Notley’s time in office. One party must surely be better at managing provincial finances, a reasonable person might conclude. But neither outcome was due to policy decisions made by their governments. They were merely the result of good luck and bad.
How’d we end up here? And how can we do better?
Financial booms and busts are nothing new to Alberta. The early decades of the province were, to quote a detailed Bank of Canada analysis of Alberta’s finances made in 1937, a time of “waste, loose administration and incurrence of debt to an extent which could not be justified.”
Alberta’s financial position “had been so unfavourable in itself and so seriously out of line with that in other provinces that there is little excuse for the failure to take more determined steps to correct it.” Public debt rose to such unmanageable levels—exceeding all other provinces except the much larger Ontario—that Alberta finally went bankrupt on April 1, 1936. We were the first and are still the only province ever to have defaulted.
High spending was not the only reason; low taxes were also to blame. “It was frequently stated,” the report observed, “that Alberta citizens… should not be expected to contribute directly to the provincial government.” Similar tax aversion exists today, but, unlike in those early decades, significant revenues from natural resources now make low taxes possible.
While oil production in Alberta predates the province’s creation, it only became a significant contributor to government revenues after the 1950s. Intense exploration and development followed the 1947 Leduc No. 1 discovery, and by 1953 the province was producing more oil in a year than it had over its entire pre-1947 history. Revenues from royalties, land sales, fees, taxes and so on increased sharply and our fiscal addiction took hold.
Add up every single dollar Alberta levies in provincial taxes today and you get less than we spend annually on healthcare. For more than 70 years, Alberta has never balanced its books without resource revenues. I estimate we have needed roughly 30 per cent of total provincial revenues to come from resources to balance over this period, a similar share to what we need today.
This dependency creates several problems. First, spending resource revenues makes the province poorer, because resource revenues are not income in the usual sense. To understand this, imagine selling your car. This provides you with cash, but it’s not truly income. You merely converted one asset that you own (the car) into another (cash), and your overall wealth is unchanged. This is precisely what resource revenues are. The Crown owns most of the oil in Alberta, and royalties are merely the government’s share of the oil’s value when that asset is extracted and sold. It’s just that we don’t record our oil assets in the budget the way we do buildings, vehicles and so on. If we did, Alberta’s financial picture would look very different.
Excluding resource revenues, annual provincial deficits since 1950 would historically have averaged nearly 4 per cent of the economy per year. For perspective, this would be like running a $17-billion annual deficit today. Picture that, year in and year out, decade after decade, for nearly three-quarters of a century. Had we borrowed that much money, the size of our public debt would rightly raise many concerns. Recording royalties as revenue papers over this gap, but we’re no less poor for it.
It turns out that when you spend a dollar of resource revenues, you shortchange future generations just as much—perhaps even more—than when you spend a borrowed dollar. Not spending resource revenues (i.e., saving them instead) earns a return, after all. Consider Alberta’s Heritage Savings Trust Fund, which Premier Peter Lougheed originally created to save 30 per cent of Alberta’s resource revenues, though that practice ended in 1987. Today it’s worth nearly $20-billion, and it generated nearly $2-billion in investment income for the province in 2022. Over the past 10 years, the fund averaged an 8.5 per cent per year return on each dollar saved. Not saving one dollar therefore costs Albertans 8.5 cents next year in average returns not earned. Borrowing one dollar today, even at relatively high interest rates, costs less than half that in interest. Either way, it’s a cost to future Albertans.
It’s hard to overstate just how large Alberta’s missed opportunity has been.
Consider an alternative history where past Alberta governments saved every penny in natural resource revenues within the Heritage Fund, and also retained all of its earnings within the fund. Based on the actual historical performance of the fund, Alberta would have nearly $2-trillion in savings today—far more than enough to generate returns sufficient to fund the entire operations of government!
Of course, no fund would be set up that way. A more reasonable scenario involves saving all resource revenues and, like Norway, withdrawing some amount (say, 4 per cent) each year to help fund public services such as health and education. Had this approach been established from the beginning, Alberta’s Heritage Fund would today be worth nearly $700-billion. That 4 per cent withdrawal rate would provide $28-billion in stable revenue to the government this year alone. That’s more than every penny in provincial taxes currently raised from all sources.
The second major challenge is the instability of resource revenues. This hasn’t always been the case. But after the 1973–74 oil price shock—triggered by OPEC countries’ export embargo in response to Western support of Israel—the picture changed dramatically.
Until that crisis, energy prices simply didn’t fluctuate all that much. Over the two decades before 1973, the Alberta government could easily manage the relatively modest swings in resource revenues, which averaged less than $400-million (adjusted for inflation) from one year to the next. After the crisis, however, energy prices became far more volatile, and so too did Alberta’s finances. Year-to-year swings in resource revenues averaged $2.2-billion in the 1970s. Things have only worsened since. With the rise of oil sands production that took off dramatically after 2000, these annual swings have averaged more than $4.2-billion.
Today, each one dollar per barrel drop in the price of oil represents a $630-million hit to the Alberta government’s bottom line. By 2025 this may rise to roughly $850-million. And soon each dollar per barrel could be worth $1-billion to the provincial government. We are more exposed to resource revenue risks than ever before.
This obviously matters for government revenues when prices fall. Resource revenues sank from $8.9-billion in
2014–15 to less than $2.8-billion in 2015–16, for example. Add in the decline in corporate tax revenues—also due largely to a drop in oil prices—and Alberta’s government faced a sudden $8-billion revenue shortfall. Rising public debt in the Notley era was unavoidable.
But there are also problems when oil prices are high. When natural resource revenues come in above target, the provincial government typically ratchets up spending. Over the decade from 1999 to 2008, for example, actual spending exceeded the government’s own initial plans by amounts equivalent to roughly $2,000 per Albertan today. On average, I estimate nearly 80 per cent of unexpected resource revenues was spent at that time.
Alberta’s recent decisions illustrate this pattern well. Premier Danielle Smith has budgeted spending for 2023–24 that is 17 per cent higher than four years previously—more than the 16 per cent increase that occurred during former premier Notley’s time in office.
When financial plans for 2023–24 were first set in Budget 2021, the government anticipated $5.9-billion in revenues from natural resources. Fast-forward two years and the government anticipated this amount would rise to $18.4-billion—a massive, unexpected $12.5-billion increase in resource revenues flowing to the province, most of which will be spent. Specifically, Premier Smith’s first budget featured $9.4-billion more in spending for 2023–24 than Premier Kenney originally envisioned. That’s equivalent to three-quarters of the unexpected increase in natural resource revenues.
More spending was a complete reversal—indeed, a complete rejection—of the UCP government’s own fiscal plans. And, whatever the merits of new spending, it further increased Alberta’s reliance on resource revenues. Had Smith stuck with Kenney’s original plan, I estimate Alberta could balance its books with oil prices under $60 per barrel this year. Instead, we’re staring down a deficit if oil is around $75.
Each one dollar per barrel drop in the price of oil represents a $630-million hit to our government’s bottom line.
Getting off the resource revenue roller coaster might seem like a heavy lift. Relying on less resource revenue means either spending must fall or other revenues must rise. To get a sense of the magnitudes, consider a plan that would count on only half the $18-billion in such revenues that was originally projected for this year. We’d need to find roughly $9-billion in new revenues or lower spending to make the math work. A sales tax of 9 per cent could do it, or we could increase personal income taxes by 60 per cent. Alternatively we could cut the health budget by a third or eliminate all public support for K–12 education. Obviously, these are not realistic options.
Luckily it doesn’t have to be this difficult. Several gradual routes forward require neither spending cuts nor new taxes. But they do require something in unfortunately short supply: long-term discipline.
First, Alberta must make restrained spending plans and stick with them. Specifically, limit spending growth to no more than population growth plus inflation. This is a useful benchmark. In effect, growing total spending no faster than population and inflation means that the real value of government spending per Albertans is held constant. This was the main spending target of the previous, NDP government, and, since early 2023, is now codified in legislation.
Second, stop spending unexpected windfalls—even on one-time projects. If we end a year in surplus, every penny should either go into the Heritage Fund or to repay debt.
Third, raise revenues, but without new taxes. How can that happen? A convenient, simple option would be to take back control of the federal carbon tax. Currently the federal government levies carbon taxes on retail fuels such as gasoline or natural gas for home heating. The overwhelming majority of the proceeds are returned to taxpayers through direct deposits every few months. Our provincial government could, if it wanted, take back control of this important revenue stream and use the proceeds instead for targeted rebates for low-income individuals (as is done in BC) and the rest in place of resource revenues. This year, I estimate such a move could add over $2-billion to provincial revenues, and this could easily rise to nearly $4-billion by 2030 as carbon tax rates increase.
With these simple ingredients, I estimate Alberta would need less than half of its resource revenues within five years and could be saving all resource revenues by the mid-2030s. For all of this to work, oil prices of $75 per barrel are needed. If prices come in stronger, then we’d have far more room to manoeuvre.
Even if oil prices disappoint, modest new taxes—such as an employer payroll tax as found in BC and Ontario—could keep things on track. There’s ample scope for this. Taxes in Alberta are already one-third below the national average. If tax rates were set equal to Ontario’s (the next-lowest-tax province), total revenues in Alberta would increase by $19.7-billion—more than the total resource revenues currently projected for the year. That means Alberta could remain the lowest-tax province in Canada and save much more of its resource revenues sooner.
For more than 70 years, Alberta has never balanced its books without resource revenues.
At the very least, Alberta’s political leaders should start to communicate honestly with voters—and voters should give leaders the runway to do so.
“In terms of who is responsible, we all need only look in the mirror,” Premier Prentice famously said. “Collectively we got into this as Albertans and collectively we’re going to get out of it. Everybody is going to have to shoulder some share of the responsibility.” He was pilloried for saying it, but he was right. There are a number of ways we can do better.
First, we must recognize that fiscal swings are largely beyond the government’s control. Critics point to increased spending as the primary cause of the NDP deficits, which totalled $32-billion over their four years in office. Of course, had spending been reduced along with revenues, there would have been no deficit. But had spending growth not exceeded population plus inflation, the cumulative deficit would have been $25-billion. So most—over three-quarters—of the NDP deficits were due to disappointing revenues.
Improvements are also not largely due to policy decisions taken by the government. From their roughly $60 per barrel average in the year before COVID-19 struck, for example, oil prices rose above $80 by the end of 2021 and approached $120 per barrel briefly in early 2022. The resulting bounce in resource revenues was stunning: from $5.9-billion in 2019–20 to $16.2-billion in 2021–22, and over $27.5-billion in 2022–23! This fiscal improvement in 2021–22 was the largest in Canadian history, by a wide margin. But it had nothing to do with the party in power.
Second, the economy and our provincial finances are separate issues that must not be conflated. When oil prices are low, calls to “diversify” the economy take centre stage. The government rolls out incentives for one favoured industry or another—from film and television to petrochemical processing. While it is critically important to consider the long-term future of the provincial economy, and such policies may or may not be worthwhile, expanding activity in non-resource sectors will barely move the needle on provincial finances. The size and volatility of natural resource revenues are simply far too large to be offset by minor changes in where personal or corporate income taxes come from.
Third, take responsibility and stop blaming others. Too often tough fiscal times lead Alberta political leaders to pick fights with Ottawa. Provincial deficits are often blamed, for example, on supposed unfairness in the way federal transfers operate. “Why does Quebec receive equalization when it runs a surplus,” a common but mistaken argument tends to go, “but Alberta receives nothing?” This neglects that Alberta’s deficits are always and everywhere a policy choice we make. They are due neither to a weak provincial economy nor to Alberta “paying into” the equalization program, as some suppose. Equalization pays poorer provinces to fill in gaps between their ability to raise revenue compared to the national average. Unlike Quebec, Alberta is not a poorer province. And Quebec’s taxes are roughly twice Alberta’s, so when oil prices are low and resource revenues come up short, our political leaders do Albertans a disservice when they blame Ottawa for the consequences of their own gamble.
That’s nothing new, of course. Following Alberta’s bankruptcy in 1936, premier Aberhart blamed Ottawa. If the federal government would only pay the province what it was owed, he claimed, default could have been avoided. (He neglected to mention that Alberta itself owed the federal government substantially more than he supposed Ottawa owed Alberta, but Aberhart never bothered with such pesky details.) We should learn from this past and own up to the things we can control.
And finally, we should talk about taxes. While a sales tax is not necessary to ease Alberta off the resource roller coaster, it could help in so many other ways. Sales taxes are more efficient than income taxes and more stable. Plus, roughly 10 per cent of revenues would be paid by visitors to the province rather than by Albertans. That a sales tax would allow Alberta to more aggressively save resource revenues, for our substantial future benefit, is a bonus. A deep dive into the structure of Alberta’s revenues was promised by premier Jason Kenney and reiterated more recently by former finance minister Travis Toews. We should delay it no longer.
At the end of the day, Alberta is a province with extraordinary wealth and opportunities. Our budget problem is of our own making, and the need to improve it is only growing stronger. The way forward will be found in our willingness to face this challenge with honesty, maturity and shared responsibility. It’s high time we recognize our oil jackpot is not all joy and finally step off this wild fiscal ride.
Trevor Tombe is a professor of economics at the University of Calgary and a research fellow at the School of Public Policy.
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