“3. Alberta’s Fiscal Dilemma” in “A Sales Tax for Alberta”
3 Alberta’s Fiscal Dilemma
Robert L. Ascah
The people of Alberta have long grown accustomed to a relatively generous array of public services. In the early years of the province, these services were relatively simple—the provision of education, unemployment relief, and law enforcement, along with the construction and upkeep of roads, telephone lines, public buildings, and assorted public works. Since then, however, the range of government services has steadily expanded, partly in response to the growing complexity of modern life (Ascah 2013, 158–62). All of these services cost money. Albertans are not alone in expecting government services to keep pace with their needs but, Albertans do seem to be uniquely opposed to paying for those services through taxes. They seem allergic even to the mention of tax increases or new taxes—and to a sales tax, in particular. This, then, is Alberta’s fiscal dilemma: how to respond to two contrary expectations on the part of voters: the first that services will expand and the second that taxes will remain low. In other words, how can the Alberta government spend more money without raising more money?
An answer to this question—one that still guides fiscal policy in the province today—arrived in 1947 when oil was discovered not far south of Edmonton, near the town of Leduc. The province soon found itself in possession of newfound wealth in the form of unanticipated royalties. It was not long before the government began to draw on this income instead of taxes to cover the cost of expanded and enhanced public services and other public projects. This trend continued during the recession in the early 1980s and then gradually became entrenched in Alberta’s fiscal culture. As oil and gas industry executives and industry-friendly elected officials never fail to make clear, public infrastructure in Alberta is paid for in no small part by the energy sector. In other words, Alberta’s long-standing, tax-averse fiscal policy makes the province dependent on oil and gas through thick and thin.
What does the Alberta government’s heavy reliance on non-renewable resource royalties actually mean for the province? In part, it means unpredictability. The actual revenue generated by these royalties is highly unstable. As figure 3.1 illustrates, since the mid-1960s (when the data begins), the percentage of Alberta’s own-source revenue1 that comes from non-renewable resources has zigzagged from 70 percent to less than 10 percent, with the overall trend headed downward.
I am certainly not the first person to raise alarms about Alberta’s volatile revenue problem. Way back in 2002, for example, L. S. Wilson published an important edited collection of essays exploring the topic: Alberta’s Volatile Government Revenues: Policies for the Long Run. More recently, in an analysis of Alberta’s long-term fiscal future, Trevor Tombe (2018, 26–28) explored the consequences that the province’s reliance on such a highly volatile source of revenue has had on its capacity to repay debts, as measured by the ratio between its debt and its GDP. In a projection to the year 2040, Tombe finds that if Alberta continues with its customary revenue mix of low taxes and high dependence on non-renewable resource royalties, the range of possible future outcomes for its net debt-to-GDP ratio is very wide. Compared to Ontario, which lacks a similarly volatile component but does include a sales tax, Alberta’s future is extremely difficult to predict. In short, the greater the stability of revenue sources, the more predictable future fiscal outcomes become.
The volatility of non-renewable resource revenue causes problems for Alberta’s ability to plan for its future—but it is not the only factor that puts Alberta’s fiscal future into question. This volatility is compounded by the manner in which the government has chosen to use non-renewable resource revenue. As Al O’Brien, a former deputy finance minister in the provincial Department of Finance and Treasury, told me, “Royalty receipts are not revenue” (interview with author, 3 November 2018). O’Brien was making a distinction between non-renewable resource revenue and “ordinary” sources of government revenue such as taxes and other mandatory charges. Taxes are compulsory financial charges that governments impose on individuals, corporations, and other legal entities. Revenue from non-renewable resources is ultimately generated by royalties and other charges (variously known as bonuses, sales of Crown leases, and rentals and fees). Royalties are a percentage of a resource developer’s profit that they pay to the resource owner (in this case Alberta). These royalties and other charges are paid in exchange for the right to develop and sell the resource. Unlike tax revenue, the royalties and charges that make up resource revenue are, for accounting purposes, akin to the sale of public assets—in this case, irreplaceable natural resources—to corporations, who then exploit them for one-time private profit.
Figure 3.1. Non-renewable resource revenue as percentage of own-source revenue, 1965–66 to 2020–21
Source: Ronald Kneebone and Margarita Wilkins, “Canadian Provincial Government Budget Data—All Provinces Updated to 2019/20 and Some to 2020/21” (Excel spreadsheet), October 2021 version, available from University of Calgary School of Public Policy, “Research Data,” http://www.policyschool.ca/publication-category/research-data/.
From an accounting point of view, the difference between tax revenue and royalties is crucial. Let’s look at a couple of simple examples. Say someone gives you $20. You now have $20 more than you had before. This example approximates tax revenue. Now say you buy a house for $200,000. You now have $200,000 less, but you own a house. Several years later, you sell the house for $180,000. The gross income from the sale is $180,000, but you haven’t made $180,000. In fact, on a balance sheet, you’ve lost $20,000. On top of this, you no longer have a house. This second example approximates non-renewable resource revenue. This is because, first of all, non-renewable resource revenue is acquired through the sale of a resource that, once it’s sold, it’s gone. Like the sale of the house—and unlike taxes, which are paid every year, or forests, which can be renewed—non-renewable resource revenues, whether royalties, fees, or other charges, are not repeatable. Second, resource revenue is acquired through the sale of a resource that has a recorded value. For the purposes of budgeting, the Alberta government has treated non-renewable resource revenue like taxes by crediting them directly, in their whole amount, to the government’s operating account, the General Revenue Fund. In essence, the government is selling off its finite assets and then burning off the cash. Accountants will tell you that the province should instead record the value of its non-renewable resources on its balance sheet. When the resources are sold, the sales should be recorded as simple exchanges of one asset for another: cash for access to exploit the resource. Unless there is a massive increase in the market value of the resource and the cash received was higher than the book value of the oil and gas reserves, there is no revenue, in an accounting sense, from this type of sale.
Yet for decades now, the Alberta government has used resource royalties to supplement a deficient flow of more reliable sources of revenue such as taxes and fees. It has used them, that is, as if they were repeatable, “ordinary” revenue. This is evident in the province’s spending: the Alberta government has been spending 100-cent dollars to cover its expenditures, but taxpayers have been required to pay only 30 to 90 cents of these dollars, with resource revenues topping up the rest. Under its current fiscal strategy, if it didn’t use non-renewable resource revenues in this way, the province would quickly accumulate debt.
The Consequences of Volatile Revenue
What, then, are the consequences of treating revenue from non-renewables as if it were “ordinary” revenue? To O’Brien, the answer is simple: “We [the Alberta government] have been fooling you for decades. [. . .] We’ve never had a balanced budget since the Second World War” (interview with author, 3 November 2018). In other words, treating non-renewable resource revenue as ordinary, tax-based revenue does not a balanced budget make. Rather, it leads to the illusion of a balanced budget. Indeed, as figure 3.2 shows, Alberta has not once managed to balance its budget without the inclusion of revenue from non-renewable resources since the 1965–66 fiscal year.
For Albertans, to the extent that they are aware of it at all, this situation has proved comfortable because, even in the face of rising costs, it has so far allowed them to enjoy a high level of public services (to which they feel entitled) without having to pay more taxes—as though government revenues magically expand to meet the growing needs for public services. Despite compelling advice and analysis from experts such as Tombe and Wilson, and despite Alberta’s recent boom-bust experience (2005 to 2021), revenue has not been growing at the rate of spending. Albertans’ attitudes of tax aversion and self-entitlement have proved difficult to dislodge. Sound and sustainable fiscal policy remains elusive.
Periodically, Albertans’ public services become vulnerable to the volatility of resource royalty revenues. Over the past three decades, we have seen how cutbacks to public spending during the Klein era and the UCP government’s current efforts to freeze or reduce spending are consequences of steadily growing public expenditures being financed by variable revenue sources.
Steadily Rising Expenditure and Volatile Revenue
For successive provincial governments, neither revenue nor spending can escape the volatility of the energy royalty rollercoaster. Typically, government officials working on budgets use the rule of thumb that budget increases should follow inflation and population growth. Ideally, government revenue should track in the same direction as spending—that is, growing steadily to yield balanced budgets over the long term. As we have seen, though, overall revenue is rather volatile because of its reliance to varying degrees on non-renewable resource revenue (Figure 3.1).
Figure 3.2. Alberta’s annual deficit/surplus, 1965–66 to 2020–21, with and without non-renewable resource revenue ($ millions)
Source: Ronald Kneebone and Margarita Wilkins, “Canadian Provincial Government Budget Data—All Provinces Updated to 2019/20 and Some to 2020/21” (Excel spreadsheet), October 2021 version, available from University of Calgary School of Public Policy, “Research Data,” http://www.policyschool.ca/publication-category/research-data/.
Note: This graph is in current dollars. Current dollars do not adjust for the effects of inflation; the dollars are current in the year spent. As the figure indicates, if we take away non-renewable resource revenue, the province has run a deficit since the 1965–66 fiscal year.
Successive efforts to wean the province off this rollercoaster have met stiff political resistance. The Alberta Financial Management Commission’s (2002, 22) report Moving from Good to Great: Enhancing Alberta’s Fiscal Framework drew attention to the “increasing dependence on non-sustainable resource revenues to fund core programs such as health and education.” The report emphasized that “we can’t count on resource revenue forever. It’s time to plan now for the time when resource revenues decline” (48). The commission recommended that all revenue from non-renewables flow into the Heritage Fund, with a fixed amount then sent to the General Revenue Fund each year. This would enable the Heritage Fund to start growing again—something it hadn’t done since 1987.2 Legislation introduced after the commission’s report set the annual maximum amount that could flow to the General Revenue Fund at $3.5 billion. However, as commodity prices rose in the years following the report, the amount to be transferred from the Heritage Fund to the General Revenue Fund was quickly raised to $4.75 billion in 2006 (Kneebone and Wilkins 2018, 7–8)—that is, as non-renewable resource revenue took an upward swing, policy was adjusted to allow for spending to increase as well. The revenue tail was wagging the spending dog. The government, in transition at that time from Ralph Klein to Ed Stelmach, restructured and renamed a variety of regulated funds, and created new funds and accounts—the Sustainability Fund, the Contingency Account, the Capital Account, the Operating Account, the Saving Account, the Debt Retirement Account. Spending and fiscal discipline eroded and financial legislation changed to accommodate the current needs of political leaders, making it difficult for analysts to understand where the money was coming from and where it was going (Ascah and Bhatia 2013).
What is easy enough to understand is that revenue drives spending: when revenue grows, spending grows, too. Figure 3.3 shows provincial government spending and revenue in Alberta since 1965. The area between the lines represents either deficits or surpluses. Both lines, predictably, slope upward. It is notable, however, that the revenue line is more jagged than that that of the spending line. The revenue line also features periodic decreases, whereas spending has only fallen once during the Klein era. The last two years shown in figure 3.3 are distorted because of the extraordinary COVID-19 spending and uncommonly high federal transfers.
Another notable feature is the fact that spending is driven up even when revenue increases are primarily the result of non-renewable resource revenue windfalls. This is seen in the late 1970s and in the mid-2000s. The message should be clear: without a source of revenue that grows dependably along with population and the general economy, government spending is left to the mercy of the international markets that set the price for Alberta’s main exports. This has meant unwanted cutbacks to government services and public sector employment when the economy is in a recession. This revenue-spending mismatch, characterized by unpredictable revenue streams and predictable spending needs, highlights the importance of matching stable revenue sources with the inexorable climb in the consumption and cost of government services. A more rational and sustainable approach to government finances in a commodity-dependent economy would be to stabilize revenue sources to meet the known funding needs of government programs. Matching stable revenue with public expenditures would provide more predictability for public sector workers, provincial agencies, businesses, government contractors, investors, bondholders, and taxpayers. Such a sustainable, long-term fiscal policy would eliminate the need for the types of abrupt changes to spending or revenue policies that define Alberta’s current fiscal politics—changes that are deeply disruptive to all Albertans.
Figure 3.3. Government of Alberta revenue and expenditure, 1965–66 to 2020–21 ($ millions), adjusted for population and inflation
Source: Ronald Kneebone and Margarita Wilkins, “Canadian Provincial Government Budget Data—All Provinces Updated to 2019/20 and Some to 2020/21” (Excel spreadsheet), October 2021 version, available from University of Calgary School of Public Policy, “Research Data,” http://www.policyschool.ca/publication-category/research-data/.
What Can Governments Control?
Alberta’s fiscal dilemma—how to spend more money without reliably making more money—is not just a matter of making the math work. It is a political problem at heart. Part of the problem lies in government policies and messaging that obscure what governments are and are not able to control in terms of their jurisdiction’s finances and economy. Another part of the problem is that one of the solutions is to raise taxes—a move that makes politicians and their parties vulnerable to losing seats in a general election.
Most politicians believe their number-one job is to create or preserve employment for their constituents. Under Don Getty’s Progressive Conservatives and Rachel Notley’s New Democrats, this task was approached in an activist manner through royalty holidays, subsidies, and loan guarantees. Ralph Klein’s government pursued the employment goal by creating a fiscal regime conducive to luring investment capital through low taxes, generous royalty policies, and limited regulation without picking economic winners and losers, as he understood Getty to have done. Both approaches shared the belief that through government policy, the province’s fiscal capacity would ultimately be enhanced. Premier Jason Kenney and his Economic Recovery Council are adhering to the mantra that governments are somehow the sole creators of economic growth. Kenney has doubled down on his bet to rescue Alberta’s beleaguered economy with more corporate tax cuts, a failed bet on the Keystone XL pipeline project, and higher infrastructure spending.
This belief that government policies are the main drivers of economic growth is not unique to Alberta. Governments throughout Canada’s history have seen themselves as drivers of economic development, and in many ways they have been. The building of the Canadian Pacific Railway was literally a nation-building project. Similarly, TransCanada Pipelines and the St. Lawrence Seaway projects have been enterprises enjoying tacit government support or direct public investments (Kilbourn 1970). But in today’s global investment world, governments must be careful they are not competing against each other as global corporations play one jurisdiction against another.3
These types of approaches risk being particularly misguided in Alberta in that they tend to reinforce dependency on non-renewable resource revenue by concentrating their incentives on the non-renewable resource extraction sector. Revenue from non-renewables is not just volatile; it also depends on private corporations to carry out the extraction and production. Continuing production therefore is dependent on the cash flow of these corporations, which in turn depends on two principal factors: oil and natural gas prices and continued capital investment to sustain and grow production. Oil and gas extraction and production are highly capital intensive and historically have relied on foreign capital. As Alberta’s Recovery Plan (Government of Alberta 2020a, 2020b) confirms, Alberta’s political and corporate leaders admit the province is essentially hostage to international and domestic finance capital:
External sources of capital have become the largest source of investment into Alberta and a critical contributor to Alberta’s economic growth. Much of the economic adversity experienced by Alberta since 2014 is tied to the flight of tens of billions of dollars of capital investment. To reverse this trend, and bring back job-creating investment, Alberta’s government will create Invest Alberta, a dedicated investment promotion agency that will lead our investment attraction strategy in a new direction with better capital markets communications, proactive investment promotion targeting key companies and sectors, and concierge service for prospective investors seeking to navigate through regulatory and other hurdles. (Government of Alberta 2020a, 11)
In effect, Premier Kenney, his cabinet, and his Economic Recovery Council (headed by Jack Mintz) are admitting that Alberta does not have the homegrown capital to nurture economic growth.
A distinction between what is and is not actually financially and economically within the government’s control is pertinent to political narratives and public discourse. Understanding the difference is particularly important when, as we often find, government-sponsored initiatives make promises beyond the limits of their control, and then predictably do not achieve their revenue goals. The absence of clarity about that for which the government can actually be held accountable is a major obstacle in the public’s understanding of the province’s fiscal circumstances. All too often, however, the media and opposition do not follow up on the failures of these untenable promises. It is, therefore, useful to be able to recognize such promises as fanciful from the beginning.
There are many significant economic, jurisdictional, and financial factors outside the control of the Alberta government. These include oil and natural gas prices; Canadian dollar exchange rates; interest rates; financial market returns; regulation of, among other things, interprovincial pipelines, banks, bankruptcy and insolvency, railways, and telecommunications; and equalization payments. Though not exhaustive, this list may well be enough to make a provincial politician feel helpless—What’s the point? Why did I run for office? If we can’t control these things, how can government effectively create a climate hospitable for capital investment and jobs? Instead of publicly acknowledging the helplessness around the many factors outside their control—including, notably, the price of oil—political leaders in Alberta tend to choose to appear in control, investing their energy in “fighting,” in the name of their constituents, the external actors from whence these uncontrollable factors come, attempting to wrestle them into economic submission.
The energy that politicians put into these fights could instead be concentrated on using the tools at their disposal to manage the economic factors over which the government does have influence—for while the Alberta government cannot control the price of oil, it can influence policy outcomes in instances where its voice would legitimately be considered (for instance, Trans Mountain pipeline project). Beyond this, there remains a great deal that the provincial government can control on both its revenue and expenditure side. For instance, while the provincial government cannot control the price of oil, bitumen, and natural gas, it does have the power to establish royalty rates and dictate the pace and scale of oil sands development. Some other tools and factors at the Alberta government’s disposal include the following:
- Health-care premiums
- Public sector salaries and benefits
- Appointment of senior officials, agency boards
- Operating programs
- Capital spending
- Debt management policies
- Investment policies
- Minimum wage
- Occupational health and safety
- Labour relations (except for federally regulated enterprises)
- Municipal affairs
- Energy and environmental regulation
- Revenue (PIT, CIT, and taxes and fees related to tobacco, alcohol, cannabis, gambling, fuel, carbon)
Here’s the catch. The degree to which a government can actually control these things depends on it maintaining a strong mandate from the voting public. The political theatre of fighting factors that are outside of our control allows Albertans to maintain their sense of exceptionalism and entitlement, which they have come to take for granted. Catering to this exceptionalism does much to bolster a government’s popularity and increase its chances of re-election. However, if a government were to spend more of its energy focussing on the factors within its control—for instance, by asking Albertans to pay more for or accept new taxes to fund the services they require—it would challenge this sense of exceptionalism. This would be very unpopular.
Alberta’s fiscal dilemma is characterized by a chronic mismatch of steadily rising spending needs with volatile revenue caused by overreliance on non-renewable resource royalties. It is also characterized by another chronic issue: Alberta exceptionalism and a political hesitancy to challenge it. To ameliorate the first issue, political will, political capital, and political leadership must focus on managing key levers within the government’s policy tool box. The main tools are controlling operating and capital spending, maximizing returns to the province from resource development (subject to strict environmental accountabilities), and setting appropriate revenue policy. However, without an open discussion of the trade-offs between voters’ appetite for public services and their capacity and willingness to pay for these services, the fiscal dilemma will remain, and it will continue to fester. Without such a discussion, Alberta’s government will continue to create the illusion of solving its fiscal dilemma with messianic promises on which it cannot deliver without the divine help of the global market gods. When that help is not forthcoming, politicians turn to reducing spending on public services and infrastructure instead of risking Albertans’ wrath by speaking the word tax.
Notes
1 Own-source revenue refers to revenue other than federal transfers.
2 The Alberta Heritage Savings Trust Fund was created in 1976 to save a portion of non-renewable resource revenue in order to benefit future generations of Albertans. It was based on the assumption that the provincial government needed to save money because revenue from non-renewables would decline over time as the resource was depleted. The transfer of resource revenues to the Heritage Fund was reduced from 30 percent to 15 percent in 1982–83 and eliminated entirely in 1987–88.
3 The example of Amazon “tendering” its second head office to the highest bidder is a recent example. This behaviour is often termed a “race to the bottom.” See Wong (2018).
References
Alberta Financial Management Commission. 2002. Moving from Good to Great: Enhancing Alberta’s Fiscal Framework, chaired by David Tuer, 8 July 2002. Edmonton: Alberta Financial Management Commission.
Ascah, Robert L. 2013. “Savings of Non-Renewable Resource Revenue: Why Is It So Difficult? A Survey of Leaders’ Opinions.” In Boom and Bust Again: Policy Challenges for a Commodity-Based Economy, edited by David L. Ryan, 151–98. Edmonton: University of Alberta Press.
Ascah, Robert L., and Robert Bhatia. 2013. “Does the Budget’s New Math Add Up?” Edmonton Journal, 13 March 2013.
Government of Alberta. 2020a. Alberta’s Recovery Plan, June 2020. Available from https://open.alberta.ca/publications/albertas-recovery-plan.
Government of Alberta. 2020b. Alberta’s Recovery Plan: Economic Statement, June 2020. Edmonton: Government of Alberta. Available from https://open.alberta.ca/publications/albertas-recovery-plan.
Kilbourn, William. 1970. Pipeline—TransCanada and the Great Debate: A History of Business and Politics. Vancouver: Clarke, Irwin and Company.
Kneebone, Ronald, and Margarita Wilkins. 2018. “50 Years of Government of Alberta Budgeting.” University of Calgary School of Public Policy Publications 11, no. 26. https://doi.org/10.11575/sppp.v11i0.53364.
Tombe, Trevor. 2018. “Alberta’s Long-Term Fiscal Future.” University of Calgary School of Public Policy Publications 11, no. 31. https://doi.org/10.11575/sppp.v11i0.52965.
Wilson, L. S., ed. 2002. Alberta’s Volatile Government Revenues: Policies for the Long Run. Edmonton: Institute for Public Economics, University of Alberta.
Wong, Julia Carrie. 2018. “What Cities Offered Amazon: Helipads, Zoo Tickets, and a Street Named Alexa.” Guardian, 15 November 2018. https://www.theguardian.com/technology/2018/nov/14/amazon-next-headquarters-losing-city-bids-what-offered.
We use cookies to analyze our traffic. Please decide if you are willing to accept cookies from our website. You can change this setting anytime in Privacy Settings.