Advertisement

Alberta budget shows province must cut oil dependency

Alberta budget shows province must cut oil dependency

A steep drop in oil revenues coupled with an increased need for basic services and infrastructure investment means Alberta’s new NDP government has to put some work into reducing its reliance on oil royalties as a source of revenue.

“There’s nothing wrong with the Alberta economy,” economics professor Ronald Kneebone of the University of Calgary tells Yahoo Canada News. “It does not need diversification. It is a well-functioning economy.”

The issue, Kneebone says, is that the government has allowed itself to become too reliant on one sector of the economy — the petrochemical industry. When oil prices were high, the royalties covered as much as a third of the province’s spending, the Globe and Mail reports. By basing its core spending on oil revenues during a boom time in the industry, the province finds itself short on the funds needed to pay for core services now that the price per barrel has dropped and royalties have plummeted along with it, he explains.

“That is a problem of their own making,” Kneebone says.

After years of economic boom fuelled by high oil prices and oilsands development, Alberta’s economy is sliding into recession and struggling due to steep declines in crude oil prices. A provincial economic report issued in August forecast a large deficit and economic contraction this year, a stark change from expectations of economic growth in 2015 given by the province’s previous government in March.

That’s the climate in which Premier Rachel Notley released her first provincial budget on Tuesday. The government plan invests in construction in the province, with $34 billion in new infrastructure spending over the next five years.

But it also comes with a large provincial deficit: $6.1 billion this year, expected to grow to $18 billion before a promise to balance the budget in 2019-20. That’s a figure that might be particularly shocking in a province that became accustomed to provincial surpluses as its economy boomed.

“They have chosen to let spending increase far faster than tax revenues,” Kneebone says of past and present governments in the province.

It is unfortunate to see the new NDP government repeat the mistakes of past administrations, he says — for example in refusing to introduce a provincial sales tax that could go a long way towards reducing the provincial deficit.

Getting the provincial budget away from deficits is dependant on an optimistic forecast for oil prices. Alberta’s budget assumes that oil prices will go from about US$43 a barrel today to and $68 a barrel in 2017-18. However, the U.S. futures market forecasts oil prices of about $55 per barrel at the end of 2018 — a difference with significant consequences for the province’s coffers.

Continuing to make budgets based on guesses about what oil prices may or may not do is a mistake, Kneebone says.

“The first thing they need to do is recognize that it is, in fact, a new reality,” Kneebone says — one that requires the government to stop basing core spending on oil royalties that may or may not materialize.

The government should instead focus on increasing tax revenues and reducing spending and financial waste, he says.

“Hard choices have to made,” Kneebone says about spending and taxes. “We can do things better. Throwing money at problems is not necessarily the solution.”

Alberta’s other sectors

Of course, oil isn’t Alberta’s only industry or economic sector. The province is still a major coal producer and has a $13.7 billion manufacturing industry, though the latter has been harmed by the downturn in the petrochemical industry. And the $537 million forestry sector remains a major force in the northern parts of the province as well.

As well, biotechnology is a growing industry in the province, particularly in the Edmonton area. Agriculture and food processing are a significant factor throughout the province, and Alberta’s beef industry is well-known. And in a province with five national parks, tourism is a key employer as well, providing a net economic impact of $8.41 billion in the province in 2012.

Kneebone points out that the province has been in this position before. Oil prices fell in 1986, he says, bringing down royalties with them. But the government continued to fund programs without spending cuts, and to keep tax rates low, which resulted in a lot of provincial debt. In 1993 Ralph Klein was elected in the province on a platform of dramatically cutting government spending.

“That’s our future if we continue to do what we do now,” Kneebone says. “Four years from now, I’m willing to predict the government will have a lot of debt, there will be a new election, and a new party will be standing up to say it’s time to cut all this spending and get this under control.”