Alberta Premier Alison Redford is warning her people of bad news to come in the March 7 provincial budget. The ambitious plans she outlined in her campaign for the general election nine months ago will have to be scaled back and total spending will be frozen at last year's level.
As oil market commentators have been reporting since last June, oil in the glutted Alberta market is fetching prices far below the prevailing price in U.S. Gulf Coast ports. The provincial government's oil and gas royalty revenue this year will fall to $7 billion from last year's $13 billion.
Canadians in other provinces may have difficulty feeling Albertans' pain. Albertans still pay no provincial sales tax. In other provinces, consumers pay either a provincial sales tax, as in Saskatchewan and Manitoba, or a harmonized sales tax that wraps together the federal GST and the provincial tax. The income tax rate in Alberta is also slightly lower than in other provinces. Alberta chooses not to tax its people like other provinces, counting on oil revenues to make up the difference. This is not working out well at the moment, but that is the choice Alberta made.
Manitobans, however, should wish Alberta well in adjusting to the drop in oil and gas revenues. This province enjoys a low unemployment rate most of the time because Manitoba job-seekers easily move to Alberta and find work. Ian Tyson's line "Think I'll go out to Alberta" could be Manitoba's provincial motto, alongside "It's a dry cold."
A certain delight in seeing loud, proud Alberta taken down a peg or two by the drop in oil and gas revenues may be a natural human response but not a sound basis for understanding what is at stake.
Already a year ago, when Alberta was still assuming its royalty revenues would hold up, the province budgeted for a deficit of $886 million. If Ms. Redford continues that spending level with declining revenues, she is going to have to increase the level of borrowing substantially.
But a government whose expenses exceed its revenues even before the revenues dry up is a government with a structural deficit -- a government that cannot hope economic growth will bring its revenue and expense into balance. As Ms. Redford has rightly said, this may be a good moment for Alberta to give some careful thought to the way it finances its operations and conducts its business.
It would seem reasonable to finance the predictable, recurring expenses of government from predictable, recurring revenues such as the income tax and the sales tax. Commodity revenues are inherently volatile. It would seem reasonable to treat commodity sales revenues as a windfall that sometimes turns up and sometimes does not: When the money is there, spend it or put it in the rainy day fund, but don't finance the ordinary costs of government from a revenue source that cannot be counted on from year to year.
Political party competition, however, always puts pressure on a government to share the wealth -- deliver immediate goodies to the people by spending every cent of the royalty revenue as it comes in. Any plan to tax Albertans the same way as other Canadians would not be easily accepted by people who regard low taxes as a divinely ordained inherent right of Albertans. But events are nudging Alberta in that direction.
Ms. Redford and her Conservative party won last April's election because the leading challenger, the Wildrose Party, was new and untried and appeared to have some right-wing eccentrics in its ranks. Enough Liberals and New Democrats switched their support to Ms. Redford at the last moment to prevent Wildrose from coming to power. The usual political strategy, the one Manitobans experienced when Premier Greg Selinger broke his campaign promises on taxation and deficits, is to get the bad news out early in the term and store up the good news for the next election. It's decision time in Alberta.