But Roller Coasters Are Fun!

One of the key promises made during this election by both the New Democratic Party (NDP) and the United Conservative Party (UCP) has been to get Alberta off the resource revenue roller coaster, reduce volatility, and bring fiscal stability to the province. In essence, what the parties are promising is that, under their watch, adequate funding for the services and infrastructure Albertans rely upon will no longer depend on the global price of oil and gas in any given year.

This is an important and laudable goal — one that economists, policy analysts, and a significant portion of the province’s population have been calling on for years. The question is whether the suite of policy planks being put forward by either of the two contenders in the election will actually help achieve the promised stability.

Both parties are using Alberta’s Budget 2023, passed shortly before the election call, as the starting point for their spending and revenue promises. As such, a good place to start is by revisiting some of the key aspects of the budget.

The current state of affairs

Budget 2023 projects increasing spending by some $6 billion over what was budgeted the previous year. Despite this significant increase in spending, the budget projects a surplus of almost $2.4 billion. This feat is accomplished by projecting total resource revenues of $18.36 billion, which would represent the second-highest level of oil and gas revenues ever, second only to last year’s. To put that figure into perspective, this level of spending would have resulted in a deficit budget in every single year before 2021-2022.

How tenuous is the projected surplus in Budget 2023? The revenue figures in the budget are based on an average WTI oil price of US$79.  According to University of Calgary economist Trevor Tombe, every dollar change in the price of oil represents a change of $630 million to government revenues. That means that a drop of US$4 in the price of oil will put the province into deficit territory. The average price since April 1 has been around the US$76 range.

Tombe also points out that, as more oil sands projects reach payout, our royalty revenues per barrel of oil have increased. The impact of using these revenues to pay for expanded spending has been increased fiscal volatility, and it will continue to get worse. “We previously needed oil prices of US$70 per barrel to balance the books. Now, I estimate we need $75 ... If you thought the roller-coaster Alberta was on before was scary, just wait.”

In this context, reducing fiscal volatility means adequate and predictable funding for public services with adequate and predictable revenues. Given that both parties have promised not to run deficits, and have both made significant spending promises, the revenue part of the equation becomes increasingly important. Without it, there can be no stability in spending.

So here’s a quick look at how the party platforms fare in terms of increasing stability and reducing volatility.

UCP proposals

The UCP released their platform costing on May 18, providing the revenue and cost implications of their various promises. Their biggest commitment by far is the promised $330 million for the Calgary arena deal, broken up over three years. Other big commitments include $285 million over four years in the category of “helping overcome addictions,” $36 million over four years for women’s and children’s health, and $41 million over four years for their “Safe Streets” promises. The platform costing also includes $426 million over four years for “platform items still to be announced.” Combined, the UCP platform adds $1.094 billion in new spending over four years, with $285 million of that coming in the first year, and $332 million in year two.

The UCP’s platform will also add $215 million over four years to the province’s capital plan, primarily for addiction beds and the building of five new mental wellness facilities.

The UCP’s priciest commitments, however, are on the revenue side. The introduction of a new tax bracket of 8% on income earned under $60,000 is projected to cost the treasury $3.6 billion over four years, with $262 million of that coming in year one, and $1.04 billion in year two. Extending the fuel tax holiday through the end of 2023 will cost an additional $430 million, and the promised 25% discount for seniors on government fees and services will cost $70.5 million over four years.

The combined effect of the UCP’s platform would reduce the projected surplus for Budget 2023 to $1.482 billion. That includes a contingency fund of $1.5 billion to be used in case of natural disasters, public health emergencies, and significant oil price fluctuations. Given that a good portion of that contingency is likely already being used up in wildfire response, the question becomes whether the UCP would choose to run a deficit or cut services should the price of oil fall another dollar or two. The Fiscal Framework approved with Budget 2023 allows for deficits if revenues fall by $500 million or more from what was in the budget, but Danielle Smith has repeatedly vowed not to run deficits at all.

NDP proposals

The NDP released their platform costing at a news conference on May 16. On the operating side, the NDP platform will add $7.15 billion in spending over the next three years, although that is partially offset by $425 million in savings over the next three years thanks to something called “Better Approach to Fiscal Management — Operating Expense Review.” That makes the total extra operating spending over three years $6.725 billion, with $1.75 billion of that coming in the first year. The big ticket items for the NDP in the first year include almost $593 million for healthcare, $370 million for the cost of living initiatives like the utility rate cap and paying off the accrued debt on utility bills, $192 million on childcare and out-of-school care, and $168 million on additional training and post-secondary spaces and restoring the STEP program.

The platform costing also includes $6.3 billion in additional capital plan expenditures over the next three years. This includes things like $2.8 billion on healthcare infrastructure, $1.5 billion for building and modernizing schools, $491 million on cities, communities, arts and culture, $645 million for affordable housing, and $375 million for their Hometown Alberta commitments. The plan does not include funding for the Calgary arena project, but does leave open the possibility of funding and of providing matching funds to Edmonton, at a potential cost of $660 million over three years.

On the revenue side, the NDP also has a number of initiatives that will reduce funds coming in as revenue. The elimination of the small business tax will take some $150 million out of government coffers. The tuition freeze will reduce revenues by $104 million, and the various innovation, investment, and agriculture tax credits will add up to $80 million more in foregone revenue.

The big move by the NDP in terms of revenue, however, is the promise to raise the corporate tax rate from 8% to 11%. The NDP costing document suggests this will bring in an additional $1.575 billion in year one, and $2.3 billion and $2.4 billion in years two and three. Analysis by economist Trevor Tombe suggests the actual numbers will be lower than that, as corporations find ways through accounting to avoid the full impact of increases.

According to the NDP costing document, this combination of added expenses and revenues will result in surpluses of $1.16 billion in year one, $1.12 billion in year two, and $1.03 billion in year three. That includes a contingency fund of $2 billion. As is the case with the UCP, however, given the current price of oil, the costs associated with out-of-control wildfires across the province, and the low likelihood of the corporate tax projections holding, that surplus projection looks incredibly tenuous, at best. Given that Rachel Notley has committed to balancing the books and not running deficits, the question for them becomes where will the NDP cut if the surplus disappears?

Conclusion

In the end, what this analysis clearly shows is that neither party has made good on their promise to provide fiscal stability and end the resource revenue roller coaster. In a year where we will almost certainly generate the second-highest non-renewable resource revenues in our province’s history, we are, at best, a US$5 fluctuation in the average price of oil away from a fiscal deficit. It remains a simple truth that Alberta’s books do not balance without oil selling at a minimum of US$75. Unless that revenue is replaced with something else, then a drop in oil prices will continue to mean either deficits or cuts.

The NDP has embraced the fiscal strategy prepared for them by economist Todd Hirsch, and the UCP passed a new Fiscal Framework with Budget 2023.  Both frameworks speak of savings, of not running deficits, and of reducing reliance on resource revenues. But neither document actually lays out a plan for replacing resource revenues in the budget.

So, despite the bluster and rhetoric coming from both parties, the reality is that the fiscal plans and the campaign promises they have put before Albertans in this election will only make the province — and the stability and success of our public services and infrastructure — more dependent than ever on the price of oil and gas. Let the roller-coaster ride carry on. 

 

(Photos by Chris de Tempe and David Traña on Unsplash)