Analysis

Winnipeg Free Press - ONLINE EDITION

Alberta’s ballooning deficit easily was preventable

By: Mark Milke

Posted: 09/10/2012 1:44 PM | Comments: 0

Alberta’s revenues are more dependent on gas than oil. (HASAN JAMALI / ASSOCIATED PRESS ARCHIVES)

CALGARY — As many students enrolled in algebra class are likely discovering, numbers can be rather dry. But a proper understanding of them is indispensable to modern life. Without hard, reliable numbers regularly checked, much personal, business, and government planning would be akin to gambling: throw the dice, risk the cash and hope for the best.

I digress on the importance of numbers because as arid as they are, it’s always curious when governments go to great efforts to avoid discussing them.

The latest example occurred right before the Labour Day weekend. The Alberta government released its first quarter update on the province’s 2012/13 finances on the Thursday, before everyone’s mind went on vacation for the last time this summer.

That was one indication that Alberta’s government hoped any coverage and commentary would be dead once most people were off summer vacation and before they were again paying attention.

Another was how the province omitted much useful information, including a more substantial breakdown of its revenues. It also didn’t provide an update on how low the Sustainability Fund (the province’s "savings account," used to close the gap between expenses and revenues) is forecast to sink this year.

Those and other omissions were a stark departure from 19 years of consistent reporting that started under the reforms of then-finance minister Jim Dinning in 1993. Such reforms were brought in to move away from the political games played with public finance reporting, rife in the 1980s and early 1990s.

Anyway, the bad news is Alberta’s deficit this year is likely to be between $2.3 billion and $3 billion. That’s a tad higher than the optimistic $886-million deficit the government, in full pre-election mode, forecast back in February of this year.

The revised forecast arrives despite the government’s own admission Alberta is doing quite well by almost any economic indicator.

But how can Alberta run a possible $3-billion deficit in such magnificent circumstances?

In its update, the province pointed out the obvious: resource prices are volatile, as are the revenues derived from same.

But every Albertan knows that. The problem is the provincial government is still spending as if these were the boom years of 2005 or 2006.

Back then, during the months that correspond with the 2005/06 fiscal year, natural gas prices ranged from a low of $6.22 to a high of $15.39 (using the Henry Hub price as the historical data is available). A barrel of oil (West Texas) ranged from $46.99 to $69.91.

More recently, the year-to-date average for natural gas is $2.51 with oil at $96.26. So natural gas is significantly lower and oil higher when compared to the boom years.

But over the last decade, Alberta’s revenues have been much more dependent on gas than on oil. So when gas is down, so too are provincial revenues.

For example, in 2001, gas royalties accounted for 68 per cent of resource revenues. That figure was 58 per cent in 2006 but just 11 per cent last year.

That helps explain why total resource revenue bounced from $10.6 billion in 2001, to $14.4 billion in 2006 and back down to $11.6 billion last year.

When revenues are at an all-time high, any departure from such lofty heights will make it difficult to balance the provincial books. But that’s why no person or province should, in the extraordinary years, max out their spending as if their highest-income year will last forever.

Which leads to another observation derived from dry numbers: Back in fiscal year 2006, the province spent $9,538 per person on programs (adjusted for inflation to 2012). This year, per person program spending, again adjusted for inflation, is forecast to be $10,619 per person.

This tells us that, clearly, the province dramatically increased program spending despite the decrease in resource revenues.

Yet if, since 2006, the province had tied growth in operating spending to inflation and population growth, it would spend almost $4.2 billion less this year. There wouldn’t be talk of a possible $3-billion deficit this year; there would instead be predictions of a $1.2-billion surplus. To repeat, a $1.2-billion surplus, simply by restraining the growth in spending since 2006 to account for inflation and population growth.

Sure, to restrain such growth would require the province to negotiate less-generous public-sector contracts, including moderating public-sector wage increases and signing fewer sweetheart deals on pension costs.

But there are two sides to a ledger and revenues were never going to stay at an all-time peak. Alberta’s politicians may wish to revisit their spending patterns over the last half-decade, built as they were on boom-time assumptions.

Mark Milke is the Alberta Director for the Fraser Institute.

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