What a difference a year makes.
The Alberta government finds itself in a fiscal position we would never have imagined just 12 months ago. Through a combination of tough spending decisions and a remarkable turnaround in revenues, the province has gone from an expected $18.2-billion deficit to a $511-million surplus. Now, what should we do with it?
With the budget balanced, it’s time for Alberta to turn its attention towards two critical priorities that will help ensure a stable and prosperous future for the province: achieving long-term fiscal sustainability and positioning Alberta to be a global leader in clean energy and emissions reduction solutions.
Before we get there, it’s worth digging into why Alberta’s fiscal future suddenly looks so much better than it did a year ago.
The first part of the story is on the spending side of the equation. By implementing a range of recommendations from the MacKinnon report, Alberta has brought the expense profile of many areas in line with our peer provinces. This was an important task that results in expenses tracking roughly $6.5 billion lower than if spending growth hadn’t been curtailed.
Second, the post-pandemic recovery has been stronger than expected, which, combined with federal income supports, has boosted a wide range of provincial revenues, most notably personal and corporate income taxes.
But, a key part of Alberta’s strong fiscal performance has been, and will likely be for some time, resource royalties. The Alberta government expects to collect a record $13.8 billion in oil and gas royalties this year. That’s a huge change from a year ago, when the province was expecting just $4.7 billion in 2022-23.
That estimate is looking almost sure to be low. The budget assumes an average oil price of US$70 per barrel. Tight supplies, in addition to the war in Ukraine, have pushed prices well above US$100 per barrel. For every dollar that the government underestimates oil prices, it collects an additional $500 million in revenues. We’re seeing that much change often daily now. If high prices persist for even part of the year, the government will collect billions of dollars above its current estimates.
This is why the province can suddenly afford to drop its fuel tax—at a potential cost of $1.3 billion if it lasts the entire year—and provide electricity rebates to consumers facing skyrocketing utility bills.
All that to say, the provincial government suddenly finds itself in a position of revenue abundance. So, where do we go from here?
The first thing we should do is think long-term about Alberta’s revenue model. It is time to find a model that creates stability, certainty and equity. Revamping our tax structure through options like lowering income taxes and introducing a means-tested sales tax could improve revenue stability, enhance economic competitiveness and allow the province to save even more royalty revenues.
For example, Alberta could commit to spend, say, only the first $8 billion in royalty money and put the rest into the Heritage Savings Trust Fund. This would reduce short-term volatility as well as build a long-term revenue stream for future generations of Albertans, and might decrease the pressure to over-spend. Paying down the debt is also an option, although investment revenues from the heritage fund are typically higher than the money saved from lower debt-servicing costs.
And finally, we should deploy some of our fiscal resources to position Alberta for success in a low-carbon future. This isn’t about propping up an industry whose days are numbered. It’s about accepting that global demand for fossil fuels will persist for decades but must be done with low to net-zero emissions. Short-term, the best thing Alberta can do for the economy and the environment is to become the lowest-carbon supplier of that energy. Longer-term, we need to invest in our energy future. That means leveraging our resources and know-how to become a world leader in low-carbon energy, carbon capture and in developing and exporting environmental solutions.
Alberta now has the financial means to do all these things. Let’s not repeat the mistakes of past booms. Let’s seize this opportunity to create a bright, stable and sustainable future for Alberta.
As appeared in the Calgary Herald
Adam Legge is President of the Business Council of Alberta.