OPINION | Gambling on oil prices, Alberta's budget is not prudent, responsible — or new

The budget reveals, yet again, the need for us to confront what we have failed to confront for generations: our reliance on an unpredictable source of revenue, says economist Trevor Tombe.

'Budget 2020 continues the very long tradition in Alberta of basing financial decisions on hopes and dreams'

Alberta Finance Minister Travis Toews speaks to the media ahead of tabling Budget 2020 in Edmonton on Feb. 27. (Juris Graney/CBC)

This column is an opinion from Trevor Tombe, an associate professor of economics at the University of Calgary.

"This budget continues the responsible four-year fiscal plan that started with Budget 2019," declared Alberta Finance Minister Travis Toews in introducing the province's latest budget on Thursday.

"We are on track to eliminate the deficit," he added.

Alas, Budget 2020 is neither responsible nor on track to eliminate the deficit.

Instead, the budget reveals, yet again, the need for us to confront what Alberta — and Albertans — have failed to confront for generations: our reliance on an unpredictable source of revenue.

Despite the massive drop in markets, oil prices and growth forecasts the world over, the government put forward projections in Budget 2020 that are a carbon copy of their outlook in Budget 2019. No adjustments. No additional prudence. Just doubling down on a budget plan that has fallen completely off the rails.

Oil prices are (as of this writing) barely $45 per barrel, while the government is banking on $58. Two years from now, we'll need $63 per barrel of oil to balance the books. This is a very optimistic gamble, with huge implications for Alberta's finances.

If the budget projections don't pan out, then we're nowhere near the target to balance by 2022. Here are my own estimates that update the government numbers to reflect the current prices for oil today and in the near future.

Of course, it's impossible to predict future oil prices with any precision. But this doesn't let Alberta's government off the hook. A prudent approach would be to budget only a very small, near-certain amount of resource revenues. Anything above that would then be saved.

The unpredictability is the problem we need to confront. 

Instead, we're gambling on higher oil prices, leaving no room for error and hoping the budget will balance itself. This is not prudent. This is not responsible. 

But this is not new.

A collective challenge for Alberta

I don't mean for this to sound like a critique solely of the current government. Not at all. Budget 2020 continues the very long tradition in Alberta of basing financial decisions on hopes and dreams.

The previous NDP government did this very same thing. As did the PC government before them. And the Social Credit government before them.

No budget since the late 1940s has been balanced without gambling on resource revenues. It's a consistent pattern of policy choices. The consequences: lower taxes, higher spending and more volatility.

When resource revenues rise, governments often increase spending. And occasionally they will decrease taxes. When resource revenues fall, governments do the reverse. Voters reward governments with surpluses and punish those with deficits. Whether governments are responsible or not seems secondary. 

We're therefore all responsible for the risks we take, government and citizen alike. The debt accumulation, the wild swings in spending, the inefficient tax regime. All of it. It's on us.

Former premier Jim Prentice, who five years ago was tackling the same fiscal challenge we are in today, said "in terms of who is responsible, we all need only look in the mirror … 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."

While this statement contributed in no small part to Prentice's loss in the 2015 election, he was right. And he wasn't alone.

Economist Trevor Tombe says former premier Jim Prentice was right about Alberta's reliance on resource revenues. Prentice said, 'In terms of who is responsible, we all need only look in the mirror.' (CBC)

Over two decades earlier, another former premier, Ralph Klein, said during his leadership race in 1992 that "if any discussion about deficit reduction is to be taken seriously, then governments have to be honest with their constituents, and the constituents, the people, have to be honest with their governments."

It's a two-way street, he wisely noted. Both sides need to be honest with one another. And currently, neither side is.

Government needs to lay out the facts, clearly and honestly. The budget regularly cites the MacKinnon Report's analysis on spending, for example, but ignores the report's analysis of Alberta's indisputable revenue problem. That is not honest.

And citizens need to give government space to be honest. We must discuss the pros and cons of different options without the reaction rising to DEFCON 1 day after day after day. That is not honest, either.

Tough choices. Let's talk about them

Even when (if?) we balance the books in 2022, a massive revenue challenge will remain. We will rely on over $8.5 billion in volatile resource revenues. This, more than anything else, is Alberta's budget challenge. Addressing it won't be easy.

Consider the scale of the swings:

Do you want your taxes to rise and fall by thousands of dollars from one year to the next?

Do you want public services to similarly rise and fall by billions?

Do you want to use public debt to absorb the shocks and smooth out good times and bad?

Currently in Alberta, those are your options.

It's fair enough to pick one, but we need to be open and honest about the choice that we're making. That's not what Budget 2020 does. It's a budget in denial of reality.

The government desires stable fiscal policy, it seems, but is unwilling to use debt to achieve it. We cannot, at the moment, have both. When oil prices rise or fall, we must accept wild swings in taxes and spending or wild swings in surpluses and deficits.

Versions of this bumper sticker, praying for another oil boom, have been seen on cars in Alberta for decades. (Mike Morrison/Twitter)

There's another way.

We could change the way we budget. We could take a page from Prentice's 2015 budget and save half of all resource revenues coming into the budget. Or we could pick a very conservative level of resource revenues — say, $3 billion — and count only on that.

Anything more is saved, to serve as a natural shock absorber.

Budget 2020 avoided the hard questions

Many will debate and discuss the pros and cons of tax changes and spending restraint contained in Alberta's latest budget. Such discussion is valuable and healthy.

But regardless of whether you want low spending or high, or higher taxes or not, there's a problem that needs fixing: our reliance on oil and gas revenues.

I don't doubt the government's resolve to eliminate the deficit by 2022. But Budget 2020 presented no credible plan to get there. Something will have to change, unless pure luck intervenes.

Pretending a problem does not exist doesn't make it so.

This column is an opinion. For more information about our commentary section, please read this editor's blog and our FAQ.


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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