Notley counting on oil rebound to solve Alberta’s fiscal problems

The Alberta premier is crossing her fingers, hoping for an increase in oil prices to save the province's economy

By Steve Lafleur
and Ben Eisen
The Fraser Instiute

VANCOUVER, B.C. Oct. 25, 2016/ Troy Media/ – It’s no secret Alberta’s public finances are deteriorating rapidly. The province is hemorrhaging $10 billion per year and poised to rack up debt at record speed. The provincial government urgently needs to repair the province’s battered finances. Unfortunately, despite paying lip-service to the idea that governments should avoid budgeting based on oil price fluctuations, Premier Rachel Notley seems to be crossing her fingers and hoping for oil prices to recover.

notley alberta
Steve Lafleur

It’s first important to understand how we got into this mess. The province is running large deficits today primarily because successive provincial governments have spent imprudently. For more than a decade, spending growth consistently outstripped the combined rate of inflation plus population, increasing pressure on the budget.

Because of this rapid spending growth, Alberta ran deficit after deficit in recent years. In fact, this year’s will be its eighth in nine fiscal years. Many of those deficits bloomed during a period of historically high oil prices and resource revenues.

notley alberta
Ben Eisen

When oil prices eventually collapsed, the unsustainability of Alberta’s spending became even more obvious as the deficit grew much larger. But here’s the critical point. Alberta’s finances were already deteriorating when oil prices were high. If the province had constrained spending increases more prudently (at the rate of inflation plus population growth) over the past decade, today’s deficits would be approximately one-tenth their current size. In short, spending created Alberta’s fiscal crunch – not low oil prices.

Given that the province’s spending levels have been proven unsustainable, even during periods of high energy prices, it’s clear that Alberta must reform and reduce provincial spending. But that’s not what the government is doing. Instead, it’s focused entirely on the revenue side of the ledger, introducing a slew of tax hikes over the past 18 months and hoping for a rebound in oil prices.

Interestingly, Notley recently acknowledged that “changing government policy on the basis of a two or three day rally would be a fool’s game,” in response to the price of West Texas Intermediate rising above $50.

While the premier was right to note the potential folly of changing government policy on fluctuations in oil prices, similar logic should apply to the province’s longer-term fiscal trajectory. Building a fiscal and deficit-reduction plan utterly reliant on oil prices rising places the province’s financial position at unnecessary risk.

But again, that’s exactly what the government is doing. Its long-term deficit reduction plan involves no spending cuts and is based largely on the hope oil prices will recover strongly, driving revenue increases that will finally balance the budget around 2024.

In reality, another oil price rebound alone likely won’t be enough to pay for current unsustainable spending levels. Remember, Alberta was running deficits even before prices fell, and consider that one recent estimate suggests even if oil prices rebounded to $100/barrel this year, it still wouldn’t be enough to balance the budget.

Alberta’s finances are in trouble, and the province needs a plan to bring spending down to sustainable levels. Instead, Notley is crossing her fingers, but hope alone is not a plan. Albertans deserve better.

Steve Lafleur and Ben Eisen are analysts with the Fraser Institute’s Alberta Prosperity Initiative.

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