4 The Revenue Push and Spending Pull A Double-Edged Look at the Source of Alberta’s Fiscal Ills

Provincial Revenue

Figure 4.1 provides an overview of the sources of revenue over which the Alberta government has some control. The two major sources of revenue for the provincial government are non-renewable resource revenue and PIT. Although non-renewable resource revenue has dominated revenue sources since the mid-1960s and before, it is also the most volatile revenue source. This volatility is shown in figure 4.1 by the steep peaks and dips in the resource revenue line, which represent periods when the prices for oil and natural gas have had a significant impact on resource revenue. For example, we see sharp rises in the 1970s caused by the OPEC (Organization of the Petroleum Exporting Countries) embargo and Iranian revolution. Similarly, in the 2000s, resource revenue rose rapidly because of price increases, especially for natural gas, and because of growing production in the oil sands. Unlike volatile resource revenue, we see a relatively smooth, steady growth in PIT over time. CIT also shows growth that is relatively stable compared to resource revenue, though more variable than PIT and growing at a slower rate. PIT and CIT revenues were about equal in 1965; by 2020, CIT represented less than one-third of PIT revenue, adjusted for population growth and inflation. There is, of course, no line for a sales tax.

Figure 4.1 clearly shows the instability of non-renewable resource revenue. What is especially dramatic is the fact that non-renewable resource revenue exceeded PIT revenue from 1965–66 through to 1986–87. This dominance resumed for a shorter period between 2000–01 and 2009–10. In other words, an unstable source of revenue exceeded personal tax revenues in thirty-seven of the past fifty-five fiscal years. At the turn of the millennium in particular, the resource revenue floodgates opened. It is this type of resource bounty that successive Alberta governments have banked on to pay for a significant portion of spending on public services and infrastructure and, at certain times, to reduce or at least not raise taxes.

Table 4.1 shows the results of measuring the volatility of each major revenue source for the fiscal years 1965–66 to 2020–21. The table shows the standard deviation measures for the full period between 1965 and 2021, as well as for seven ten-year slices within that period. Standard deviation is the degree by which each data point diverges from a data set’s mean, or average, value. A low standard deviation measure indicates that the values within a single population sample tend to be close to the mean value of that sample; a high standard deviation indicates the opposite. Said differently, the lower the standard deviation, the lower the volatility of the numbers in a sample. In this case, those numbers are the annual changes, in percent, to Alberta’s three major revenue sources: PIT, CIT, and non-renewable resource revenue. The data in in table 4.1 reveal that resource revenue, when considered across the full time period in question, is on average about 2.5 times more volatile than PIT and about 1.25 times more volatile than CIT.

Source: Author’s calculations based on 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/.

This result is tied to the fact that many of the largest corporate taxpayers in Alberta are oil and gas companies whose profitability varies significantly over time with the prices of oil, bitumen, and natural gas, which are themselves, of course, very volatile.1

Generally unknown to most Albertans is another source of unstable revenue, unrelated to fluctuating oil and natural gas prices and oil patch activity: investment income. Amendments to the Alberta Heritage Savings Trust Fund Act (SA 1996, c. A-27.01) transitioned the fund’s investment income from being mainly based on predictable interest payments to relying more on equities whose value can fluctuate dramatically. This change has produced greater volatility in the fund’s earnings (see, for example, the dramatic dips in 2003–04 and 2009–10 in figure 4.2). Investment income—which, since 2008, has been heavily dependent on the success of AIMCo’s (Alberta Investment Management Corporation) management of Heritage Fund assets—exposes Alberta’s revenue structure to domestic and international bond, public equity, and private equity markets, as well as infrastructure and commercial real estate. While it might appear that investment income has stabilized since the 2008–09 financial crisis, AIMCo’s management and board came in for significant criticism in April 2020 when Institutional Investor published a story about AIMCo’s volatility-based trading strategy, which resulted in expected losses of approximately $2.1 billion to its clients, including the Heritage Fund (Orr 2020; Uebelein 2020).

It is also worthwhile looking at Alberta’s revenue mix compared to those of other major Canadian provinces. Table 4.2 shows the significant differences in the revenue structure among Canada’s largest provincial jurisdictions—Alberta, British Columbia, Ontario, and Québec—based on figures from the years 2019–20 or 2020–21. Alberta is an outlier in this group because of its resource revenue and the absence of a sales tax. Alberta is also an outlier when it comes to investment income, which is mainly earned through the Heritage Fund.

Notably, in 2020–21, Alberta derived a much higher proportion of its own-source revenue from PIT than in other years. This is because non-renewable resource revenue in that fiscal year was low as a result of low oil and natural gas prices. As well, Alberta’s enterprise revenue is normally closer to that of other provinces (which have significant hydroelectric power revenue) thanks in large part to the revenue from the Alberta Gaming, Liquor and Cannabis Commission and ATB Financial. However, a massive write-down at the government’s North West Refining heavy oil upgrader in 2020–21 made Alberta’s enterprise income negligible. Still, table 4.2 confirms Alberta’s exceptionalism based on its resource wealth and its continuing political choice to rely on the sales of a non-renewable resource and investment income derived from setting some resource revenue aside. By presenting data from other provinces, I do not intend to show that these provinces are in better fiscal shape than Alberta. Rather, presenting this information is a means of illustrating that other provinces have policies that result in more balanced and broader sources of revenue, and Alberta politicians could consider these. Table 4.2 illustrates in particular how important the sales tax is for these other major provincial governments.

As should be abundantly clear by now, Alberta does have a revenue problem—namely, that its revenue mix is unstable and highly dependent on the rise and fall of oil and gas prices. What’s more, Alberta has been building this revenue problem into its legislation through changes such as those made to the Alberta Heritage Savings Trust Fund Act in 1996. Taken together, as the MacKinnon Report succinctly put it, this has made “budgeting in Alberta . . . challenging” (Blue Ribbon Panel on Alberta’s Finances 2019, 12). As that report found, and as my analysis suggests, Alberta’s revenue problem is structural. It has dogged the province since at least the mid-1960s. But revenue is only one side of the coin. Just because we do have a revenue problem doesn’t mean we don’t have a spending problem.

Sources: Government of Alberta, Annual Report: Government of Alberta 2020–21, available from https://www.alberta.ca/government-and-ministry-annual-reports.aspx; Government of British Columbia, Public Accounts 2020/21, available from https://www2.gov.bc.ca/gov/content/governments/finances/public-accounts; Government of Ontario, Public Accounts of Ontario: Annual Report and Consolidated Financial Statements 2020–2021, available from https://www.ontario.ca/page/public-accounts-ontario-2020-21; Gouvernement du Québec, Consolidated Financial Statements of the Gouvernement du Québec, vol. 1, Public Accounts 2019–2020, http://www.finances.gouv.qc.ca/documents/Comptespublics/fr/CPTFR_vol1-2019-2020.pdf.

Provincial Expenditure

Let’s take a closer look at the Alberta government’s major spending functions using the same analytical tool employed earlier: standard deviation. Figure 4.3 represents the same 1965–66 to 2020–21 time period used in figure 4.1, and illustrates in part the Klein-era reductions in spending between 1993 and 1996. These spending cuts targeted capital spending and departmental operating expenditures outside the health, education, and social services budgets. The figure also shows the explosion of spending in the health care sector relative to other sectors such as education and social services since 2000. What distinguishes spending patterns from revenue patterns are the relatively minor year-to-year changes in spending in each major expenditure envelope. Changes are especially muted in social services and education spending.

Table 4.3 shows the standard deviation calculations for the province’s expenditure over the whole fifty-five-year period and for ten-year slices therein. The table shows that “other program expenditures” are the most volatile of the four major spending categories over the long term. It makes intuitive sense that the core programs of government—the health care, education, and social services ministries—would be less prone to wide fluctuations in spending because they are more likely to receive stable, predictable funding. Departments in the “other” category serve smaller population groups (e.g., farmers, business groups, construction firms) and are not considered core. Their pleas and requests for funding can be dismissed as less urgent or merely the products of self-interest, making them more prone to cutbacks. Such “other program expenditures” are therefore more discretionary—seen as more “optional”—than the core programs within the health, education, and social services ministries. Of these three less discretionary spending programs, social services have the least variation and education has the highest variation.

Source: Author’s calculations based on 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/.

Table 4.4 compares the variability Alberta’s major spending functions to that of its major revenue sources. The province’s expenditures in its three core programs—health, education, and social services—are less variable than every major revenue source, and while “other” program spending is more volatile than PIT, it is less variable than both CIT and non-renewable resource revenue.

Source: Author’s calculations based on 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/.

So, we know that Alberta’s revenue is highly variable compared to its spending—but is Alberta’s spending high? There is ample evidence to “prove” that, compared to other major province’s, the answer to this question is “yes.” However, one’s ability to draw such a conclusion depends on the mathematical, comparative relationships selected and the time periods they analyze (McMillan 2015; Boessenkool and Eisen 2012; Boessenkool 2010; MacKinnon and Mintz 2017; Blue Ribbon Panel 2019; Ascah, Harrison, and Mueller 2019). In other words, while evidence exists, it is by no means definitive.

As with polling questions, the selection of facts and comparators cannot be assumed to be “value free.” People have different points of view, and those points of view influence how they look at and look into certain questions. In the case of government spending, the inquiry may, for instance, be motivated by a desire to defend or reduce public sector employment, to raise or lower taxes, or to advocate for some other specific position. Labour groups like to compare public spending to either GDP or personal disposable income. Business groups like to compare per capita spending and salaries of one provincial government to those of other provincial governments. Some analysts compare Alberta’s spending levels against a provincial average; others prefer to compare Alberta spending or revenue with that of other major provinces (British Columbia, Ontario, and Québec) or against to Alberta’s neighbours (Saskatchewan and British Columbia). It’s easy to see how politicians could be confused by all the differing conclusions reached about the same spending or revenue numbers, but one thing is for sure: wages and spending have been spiralling upwards in Alberta for decades. Kevin Taft told me he expects that this will eventually “turn into a downward spiral. The wealth flowing into the private sector will start to decline, [which will] reduce the upward pressure on public sector wages.” But this isn’t necessarily a bad thing. Looking at comparative services between British Columbia and Alberta, Taft remarked, “I often ask myself if I go to British Columbia—Vancouver, Victoria, or whatever: Do I see perceptively worse public services there? The roads aren’t worse, the cities are clean, the infrastructure’s good. University of British Columbia and University of Victoria are excellent universities. Hospitals are good. You can run a province with lower spending and still do a very good job” (interview with author, 26 November 2018).

Experts delving into the jurisdictional comparisons soon discover that data availability, accounting peculiarities, time periods chosen, and widely varied government budget structures make it difficult to create meaningful longitudinal comparisons (Busby and Robson 2014; Kneebone and Wilkins 2016). Panel A of table 4.5 offers snapshot-in-time comparisons among Alberta, British Columbia, Ontario and, Québec for per capita spending based on 2019–20 and 2020–21 public accounts information.2 Additional aggregate information is provided in panel B.

Table 4.5 confirms the view that Alberta spends more per capita compared to other major provinces—provinces with whom Alberta normally competes for investment and jobs.3 However, one would be mistaken to think that the claim of cutting spending alone addresses the deeper question of Alberta’s fiscal sustainability. Take, for instance, the claim that per capita spending in Alberta is too high because public sector wages have been historically, and unnecessarily, higher than the rest of the country (MacKinnon 2019, 44–50). Cut the wages, solve the spending problem, right?

Not necessarily—but this is not to say that the argument has no merit. One-half of operating spending goes to wages and benefits in Alberta. One reason typically given to justify high public sector wages is that Alberta’s public sector employers must “compete” with Alberta’s private sector, which is dominated by the high-paying oil and gas sector. Another often cited reason is that these high wages are necessary to compensate for higher costs of living in Alberta compared to other provinces. It is argued that these factors make it necessary to have higher public sector salaries to attract employees, including those from outside the province or country, to the public service. Arguments about high cost of living in Alberta tend, however, to ignore the absence of a sales tax, the absence of health-care premiums, lower marginal tax rates, and higher income tax exemption levels. In other words, these arguments tend to leave out the fact that Albertans pay very little in taxes compared to other major provinces. Add to this the fact that Alberta’s housing costs today are lower than those in Vancouver, Toronto, Montréal, and Ottawa, and the cost-of-living argument is on thin ice. Perhaps Albertans in the public sector are paid too much.

Sources: Government of Alberta, Annual Report: Government of Alberta 2020–21, available from https://www.alberta.ca/government-and-ministry-annual-reports.aspx; Government of British Columbia, Public Accounts 2020/21, available from https://www2.gov.bc.ca/gov/content/governments/finances/public-accounts; Government of Ontario, Public Accounts of Ontario: Annual Report and Consolidated Financial Statements 2020–2021, available from https://www.ontario.ca/page/public-accounts-ontario-2020-21; Gouvernement du Québec, Consolidated Financial Statements of the Gouvernement du Québec, vol. 1, Public Accounts 2019–2020, http://www.finances.gouv.qc.ca/documents/Comptespublics/fr/CPTFR_vol1-2019-2020.pdf; Statistics Canada, “Table 17-10-0009-01: Population Estimates on July 1st, by Age and Sex,” released 29 September 2021, https://doi.org/10.25318/1710000501-eng.

* 2020–21 per capita spending data were not available at time of writing for Québec; 2019–20 data has been used instead.

† The categories of health care and social services are combined in the Québec data. This combined data has been recorded in the “health” category for Québec. The social services category for Québec shows Ministry of Family spending.

Mueller (2019) disagrees. He has argued that while there are some areas where public sector pay appears to be disproportionately high (notably in municipalities), the “excess compensation” argument is overblown. Using real earnings for public administration, education, health care, and social assistance, Mueller has shown that while Alberta public sector workers’ earnings relative to Ontario, British Columbia, and Québec have indeed been higher in the past, the difference as measured in 2018 has become much smaller (26–31). Moreover, while Alberta spending per capita is, in general, high relative to other provinces, the gap has been narrowing, in particular between Alberta, Québec, and British Columbia.

A Spending or Revenue Problem?

While there are conflicting data on the sources and the extent of spending excesses, one cannot fairly say we do not have a spending problem. Rather, the straightforward answer to the conflicting data is that Alberta has both a spending and a revenue problem. Alberta’s revenue is volatile and unpredictable. Its per capita spending, though much less volatile than its revenue, tends to be higher than that of other provinces.

The relative stability of spending is in large part due to the fact that spending is by and large more controllable than revenue. This is perhaps why spending is regarded by conservative governments as the source of the problem: it’s easier to solve a problem over which you have control than one over which you don’t. However, this doesn’t mean the need for spending is easily controlled. In practical terms, spending proceeds incrementally as new programs are instituted to respond to new needs. Staff must be hired and operating rooms must be properly furnished. Citizens rely on government programs and expect services to be provided, often in unpredictable waves. Since users of government services vote, politicians must respond to demands that private sector organizations would reject unless they saw a financial benefit. In short, since spending cannot be adjusted dramatically from year to year without political consequences, it stands to reason that governments should have a revenue strategy that ensures a set of steady, predictable revenue sources to avoid cutting services and incurring the wrath of the citizenry.

Figure 4.4 maps Alberta’s total per capita spending and revenue adjusted for inflation. The figure illustrates the volatile revenue streams Alberta governments have been unable to effectively manage. Rather than save a significant proportion of non-renewable resource revenue and grow the savings through reinvestment of earnings, successive governments have chosen to build the province’s financial foundation on the sands of a volatile revenue base, expensive government infrastructure, and program spending that is vulnerable to cuts when resource prices fall. Increases in revenue, usually the result of rising oil and gas prices, draw spending up, too. As resource revenue levels off, this higher spending produces budget deficits, creating fiscal pressures on provincial treasurers. This levelling-off of revenue is typically (though not always) followed by revenue declines, spending cuts, and rising debt.4 As figure 4.4 shows, this pattern of revenue push / spending pull occurred in the late 1970s, the beginning of the 2000s, and briefly during the short Redford period from 2011 to 2014. Rising energy prices lead to a rush of funding requests as predictable as the spring thaw. As we used to say in Alberta Treasury, “When things go well, they go really well—when things are bad, they are really bad.”

Figure 4.5 gives us another way of visualizing the push-pull dynamic of spending and revenue in Alberta. The graph shows the degree to which the change in Alberta’s surplus or deficit (whether that change is positive or negative) is affected by a change in Alberta’s revenue stream or spending structure (again, whether positive or negative) between 1965 and 2020. The predominance of the black bar in any given year records a period of either significant revenue decline or revenue increase. In Alberta, such decline or increase is principally associated with fluctuations in oil and/or natural gas price changes. The predominance of a grey bar in any given year shows a period of spending pressure or spending reduction. Taken as a whole, figure 4.5 is a long-term picture of the degree to which Alberta’s debt situation depends on revenue versus spending.

Fifty-four percent of the bar space shows changes in Alberta’s deficit tied to revenue; the remaining 46 percent shows changes tied to expenditures. This is consistent with our finding above that revenue sources are more volatile than spending. But these percentages don’t tell the whole story; they mask the cumulative dollar amounts at play over the full fifty-five-year period. Total year-to-year revenue changes (i.e., the absolute value of the increases and decreases) were $94.5 billion (59.3 percent) with expenditure changes totalling $64.8 billion (41.3 percent). These findings underline the critical importance that revenue plays in the overall dynamics of the province’s income statement and balance sheet.

It’s not, then, just a matter of understanding that we have both a spending and a revenue problem; it’s a matter of understanding how these two problems are intertwined. Of course, electoral competition remains ideological and depends on political parties presenting simple, compelling narratives to differentiate their “visions” from those of other political parties. In some governments—for example, the Getty and Notley periods of 1985–92 and 2015–19, respectively—the answer was increasing spending. This led to accumulating deficits, increasing public debt, and, consequently, rising debt servicing costs. In the Stelmach-Prentice period (2006–15), drawdowns of the Stabilization/Contingency Account allowed the government to respond to spending pressure while ignoring the need for adjustments to spending and/or revenue. This drawdown in savings continued for a short time under the Notley administration as well, until these savings evaporated. At the time of writing, the UCP are in government. The combination of rising debt servicing costs and the public’s aversion to debt and taxation has led the UCP to convey their “vision” by first freezing then cutting spending, notably on post-secondary education—this despite the fact that it is Alberta’s volatile revenue sources that account for a majority of cases in which the province has moved between surplus and deficit. Around we go again in the push-pull dynamic of spending and revenue. We have seen this movie before, and they seem to just keep coming out with sequels.

The thing to note is that these simple, political narratives all have something in common: They’re one-sided. Alberta’s fiscal dilemma, however, is not. The problem runs much deeper than just spending or revenue, and thus cannot be solved by simplistic fixes that appeal to only one side of the issue. The way we have allowed our spending structure to be constantly dictated by our revenue mix is a systemic issue. Those who put forward simplistic platforms to address the issue, then, also have something in common: their willful ignorance of the endemic problems in Alberta’s larger fiscal picture.

Alberta’s Savings Problem

On top of everything, when Alberta does run into tough times under its current fiscal policy structure (i.e., when its problem spending can’t be covered by its problem revenue) it has a habit of spending its savings—that is, when it has any savings to spend. In 1976, Premier Lougheed introduced the Alberta Heritage Savings Trust Fund, a public savings account with the stated goal of saving a certain amount of oil and gas revenue for future generations. This is, in principle, a great idea, especially for a province that relies on volatile revenue. However, Alberta’s fiscal propensity to spend was already too deeply entrenched for the Heritage Fund to really develop to its full potential. By 1982, Lougheed abandoned his vision of an intergenerational savings fund, adopting instead a “spend now, pay later” fiscal philosophy. This was accomplished by rebranding the Heritage Fund as a “rainy day” account—and it was raining just prior to the 1982 election. Consequently, the fund was used to finance significant increases in expenditure in 1982–83. For the first time, the government withdrew all investment income from the Heritage Fund, thereby preventing the fund from growing through reinvestment of earnings. Had Premier Lougheed left the investment income to compound without any further resource revenue deposits, my calculations show that the Heritage Fund would be worth something in the order of $260 billion today. Lougheed’s new approach to mining the Heritage Fund to make up for revenue deficits rather than adjusting the province’s revenue mix or spending structure was inherited by his successor, Don Getty, and later governments.

Between 1947 and 2020, according to data from the Canadian Association of Petroleum Producers, Alberta’s oil and gas sector producers had cumulative revenue of $2.07 trillion.5 In the same period, Alberta received $205 billion in royalties, for 10 percent return. These cumulative figures suggest Alberta could have accessed a bigger piece of the revenue but demurred from taking a larger share.6 The biggest stumbling block to receiving a higher share has been the industry’s case that unless royalties remained competitive, industry will not continue to invest. But even at this rate of return, if the Government of Alberta had continued to place 30 percent of its resource revenue in the Heritage Fund and keep all the reinvested earnings there, the fund would be worth over $400 billion today.7

More than just spending and revenue problems, then, Alberta has a two-part savings problem. On the one hand, because it relies so heavily on resource royalties to balance its budget—and because it keeps those royalties low—it doesn’t contribute much to its savings in the first place. On the other hand, because of its general lack of fiscal discipline, the province never seems to leave its savings to accrue for very long. As a result—as we’ve seen with Kenney’s UCP government—the province ends up essentially living from oil paycheque to oil paycheque and adjusting its spending in kind. Having inherited an unruly trinity of volatile revenue sources, a paltry sum of savings to address current budget needs, and an accounting policy that arguably overstates resource revenues, Kenney’s government is back at the game of cutting spending in a time of need—what Finance Minister Travis Toews (2020) has called the “triple black swan event” of COVID-19, oil price correction, and an economic shutdown. The government is hoping against hope for its revenue luck to change.

As far as savings are concerned, I believe Alberta’s savings project has failed to fulfill its original mandate of being an intergenerational savings account meant to meet the province’s fiscal needs when the oil has run out. The Heritage Fund has provided flexibility for fiscal policy purposes, but its size is now less than one-third of Alberta’s current spending. It may be a source of pride for some Albertans but if the Heritage Fund is no longer an intergenerational savings vehicle, it should be wound down.

Solving the Dilemma

Fixing Alberta’s fiscal dilemma requires a balanced approach that ensures that spending accomplishes its intended objectives and that there is a sufficient and stable revenue stream available to pay for government services. There is also a need to thoroughly examine revenue sources with a view to making a more resilient revenue stream, which essentially means making revenue more stable. And that entails looking at a sales tax.

A balanced approach is something new for Alberta—a whole new fiscal policy culture. Until now, this culture has been marked by an empty, binary debate about whether the province’s fiscal challenges lie in a problem of spending or revenue, and a series of political sleights of hand that cloud the precarity of Alberta’s fiscal situation. Fiscal policy during the Klein years was helped out by rising natural gas prices and the effects of very loose monetary policy of the early 2000s. The Kenney government has continued to stress its belief in cutting spending, maintaining low personal and corporate taxes, and trying to attract outside capital investment to the oil industry as the means of eradicating deficits. These strategies ignore the evidence presented in this chapter, which shows that revenue diversification to stabilize spending is at least as pressing an issue as lowering taxes and cutting spending. They also ignore urgent and unrelenting evidence that international financial capital is divesting from fossil fuels. The non-renewable resource that Alberta relies on so heavily as a revenue source may well disappear from the global market before oil dries up in the ground. Alberta governments will be forced to make difficult fiscal and economic choices in the very near term as climate change becomes an ever-greater factor in global investment decisions.

Alberta’s fiscal solutions require a top-to-bottom review of its revenue, spending, and savings policies with the objective of ensuring fiscal stability and long-term fiscal sustainability. Alberta’s public service has gone through enough feast-famine cycles already—it is time to reimagine a new future.

Notes

References