TEGAN HILL: Smith government must do more to avoid red ink

Article content

As Albertans look toward a new year, it’s worth reviewing the state of provincial finances. When delivering news last month of a projected $4.6-billion budget surplus for fiscal year 2024-25, the Smith government simultaneously warned Albertans a budget deficit could be looming. Confused? A $4.6-billion budget surplus sounds like good news — but not when it’s on the back of historically high (and incredibly volatile) resource revenue.

Article content

Article content

Recommended Videos

Article content

In just the last 10 years, resource revenue, which includes oil and gas royalties, has ranged from a low of $3.4 billion in 2015-16 (inflation-adjusted) to a high of $26.1 billion in 2022-23. Inflation-adjusted resource revenue is projected to be relatively high in historical terms this fiscal year at $19.8 billion.

Resource revenue volatility is not in and of itself a problem. The problem is that provincial governments tend to increase spending when resource revenue is high, but do not similarly reduce spending when resource revenue declines.

Overall, in Alberta, a $1 increase in inflation-adjusted per-person resource revenue is associated with an estimated 56-cent increase in program spending the following fiscal year, but a decline in resource revenue is not similarly associated with a reduction in program spending. Over time, this pattern has contributed to historically high levels of government spending that exceed ongoing stable levels of government revenue.

Article content

Article content

And while the Smith government has shown some restraint, spending levels remain significantly higher than reliable ongoing levels of government revenue. Put simply, unpredictable resource revenue continues to help fund Alberta’s spending — and when resource revenues inevitably fall, Alberta is at high risk of plummeting into a deficit. Indeed, Finance Minister Nate Horner continues to emphasize we are “living in extremely volatile times” and warning if oil prices fall below $70/barrel a budget deficit is “very likely.” According to recent forecasts, the price of oil may hit $66/barrel in 2025.

To avoid this fate, the Alberta government must do more to rein in spending.

Fortunately, there’s plenty of options. For example, the government spends billions in subsidies (a.k.a. corporate welfare) to select industries and businesses every year. A significant body of research shows these subsidies fail to generate widespread economic benefits. Eliminating this corporate welfare, which would generate significant savings in the budget, is a good place to start.

Article content

If the Smith government fails to rein in spending, and Alberta incurs a budget deficit, it will only mean more government debt on the backs of Albertans. And with Albertans already paying approximately $650 each in provincial government debt interest each year, that’s something Albertans simply can’t afford.

With a new year set to begin, the Smith government continues to warn of a budget deficit. But rather than simply prepare Albertans for more debt accumulation — financed by their tax dollars — the government should do more to avoid red ink. That means cutting wasteful government spending.

Tegan Hill is director of Alberta policy at the Fraser Institute

Article content