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Alberta caught in a fiscal bind

Province has a fiscal 'substance abuse' problem

THUNDER BAY, Ont. — Despite being charged with the guardianship of an exceptional economy with prosperity rooted in the volatile revenues of the oil and gas sector, there appears to be an absence of learning behaviour on the part of governments in Alberta. Government budgets are still very dependent on energy related government revenues.

Indeed, the reliance on natural resource revenues has been described by some as a fiscal "substance-abuse problem" which can turn the blessing of natural resources into a curse.

Despite a long-term trend towards economic diversification, Alberta's economy is still energy intensive. Whereas in 1985, energy accounted for 36 per cent of Alberta's GDP, by 2013 it still accounted for 23 per cent with crude petroleum accounting for two thirds of Alberta's exports. The 1970s and 1980s saw a boom and bust period whereas the 21st century witnessed an energy boom, which is now again being followed by a correction in energy prices. Despite claims that Alberta is an energy superpower, the fact remains that market superpowers can set prices rather than take them as they come.

The current plunge in oil prices is a reminder that Alberta's economic and fiscal performance is prone to cycles. Over the entire period 1970-2014, the average resource revenue share of Alberta government revenues was 31 per cent, but this ranged from as high as 77 per cent in 1979-80 to a low of 14 per cent in 1998-99. Since 2000, the resource revenue share averaged approximately 28 per cent, though in recent years it has dropped below 20 per cent. Nature's bounty means that during boom times Alberta is able to fuel rapid increases in government spending, but busts mean restraint.

Given the reluctance of Alberta to diversify its government revenue stream by implementing a provincial sales tax, another solution for provincial revenue stabilization is investment revenues from savings accumulated during periods of resource revenue abundance.

However, when it comes to oversight of the bounty afforded by natural resource revenues, Alberta has not been as persistent as other jurisdictions when it comes to investing natural resource rents in sovereign wealth funds. An adequately managed fund would have resulted in a substantial sum that could yield earnings to help stabilize the province's finances during downturns. Indeed, Alberta has squandered decades of natural resource revenues by not adequately investing them.

Although Alberta established the Alberta Heritage Savings Trust Fund (AHSTF) in 1976, there were no inflows to the fund for the period 1988 to 2005 and substantial outflows of income earned were made to the Alberta government's general operating fund and capital expenditures. Indeed, if one takes the market value of the funds and adjusts for inflation and population, there has been a near continuous decline in the real per capita value of the Heritage Fund since the early 1980s.

Compared to other resource revenue rich jurisdictions such as Alaska and Norway, Alberta's Heritage Fund has suffered from poor stewardship for much of its history. Whereas the Alberta Heritage Fund's assets are currently estimated at US$17.5 billion, Alaska's (established in 1976) is estimated at US$51.7 billion and Norway's (established 1990) was worth approximately US$890 billion. North Dakota, which established its Legacy Fund in 2011 has already managed to acquire just over $2 billion in assets. Alberta barely contributed 5 per cent of its resource revenues to its sovereign wealth fund, whereas Alaska contributed 25 per cent and Norway - albeit an extreme case - 100 per cent.

In 2007, the Alberta Financial Investment and Planning Advisory Commission chaired by the University of Calgary's Jack Mintz recommended setting a target of $100 billion in assets in a reinvigorated Alberta Heritage Fund by 2030 by saving a fixed percentage of Alberta's total revenues each year. The recommendations, however, have yet to bear fruit and the drop in energy prices now means that Alberta will have to delay any plans to build up its sovereign wealth fund.

When oil prices are high and times are good, there is little incentive for Alberta to build up its sovereign wealth fund. When oil prices fall, the need for revenue stabilization is starkly evident, but more pressing needs for dwindling government revenues supersede those of a sovereign wealth fund. Alberta is caught in a repeating cycle from which it has yet to engineer an escape.

— Livio Di Matteo is Professor of Economics at Lakehead University.

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