The most important number in this week’s Alberta budget is $3 billion — the average level of natural resource revenues that poured into Alberta coffers during the 1990s. Let me explain.
In 1981, Alberta relied on non-resource revenues to fund all but $2.6 billion of program spending, even though it took in nearly $4.7 billion in oil and gas revenues. The result was a surplus of $2.1 billion, which went into the Alberta Heritage Savings Trust fund.
Alberta saw these additional revenues not as a reliable stream of income, but as the sale of a capital asset. The government wisely realized that the oil in the ground could be sold only once, and that future generations should benefit from this one-time sale.
That forward looking attitude changed in the following year.
Alberta ramped up its spending by an almost unbelievable 35 per cent, and as a result, the gap between spending and non-resource revenues grew to $4.9 billion. The government moved to a position where the budget could only be balanced if natural resource revenues exceeded this amount — which they didn’t, and as a result the province ran a deficit of nearly $1 billion in 1982.
The bottom line was rescued in 1983 because natural resource revenues jumped to nearly $5 billion, so no corrective action was taken on the spending front. In fact, spending continued to grow faster than non resource revenues for the next few years until Alberta required $6 billion in natural resource revenues just to keep the budget balanced.
We all know the result — oil revenues never did hit $6 billion, and when natural resource revenues fell to $2 billion in 1986, a new spending level had been entrenched and a string of deficits ensued.
Alberta’s over-reliance on natural resource revenues lasted for nine years — in every year from 1982 until 1993, the gap between spending and non-natural resource revenues exceeded $3 billion. The success of the Klein revolution was to squeeze spending so that reliance on natural resource revenues fell below the magical $3 billion.
Reliance on natural resource revenues stayed below the $3-billion watermark in every balanced budget since then — suggesting that growth in spending in the last few budgets was sustainable.
And Alberta returned to the previous forward looking view with a law that says 75 per cent of any unanticipated surplus (which nearly always results from better than expected natural resource revenues) must be used to pay down the debt — a direct benefit to future generations.
Unfortunately, the Alberta government’s third quarter report released prior to the election contains a worrying signal. In that report, natural resource revenues for 2000 had shot up to a remarkable $10.2 billion. But instead of a surplus of $7 billion ($10 billion in resource revenues minus the $3-billion watermark), that report showed a surplus of only $5.5 billion.
Spending had risen faster than non-resource revenues. To repeat: In fiscal year 2000/01 the Alberta government is, for the first time since 1994, relying on more than $3 billion in natural resource revenues to keep the budget balanced.
I realize that there are a large number of so-called one-time expenditures contained in that spending — from energy rebates to money set aside for an endowment fund — that could be cut back to bring our reliance on resource revenues below the $3-billion mark. And in addition, the forecasts for oil and natural gas prices remain high. But those are just the kinds of things people were saying in the mid 1980s as spending ramped up in the expectation of never ending growth in oil revenues.
And that is the reason the most critical number in the 2001 budget will be $3 billion. If Alberta is to continue to be the poster-province of fiscal rectitude, it will have to keep its total spending at a level that is sustainable — and history shows us that in order to do that, the difference between total spending and non resource revenues should remain below $3 billion.
Ken Boessenkool is a Calgary economist and former policy advisor to Provincial Treasurer Stockwell Day