Kenney shouldn’t bank on resource revenues to balance budget—despite high commodity prices

Earlier this year, facing a $18.2 billion budget deficit (2021/22), the Kenney government said it would re-establish its path to budget balance “post-pandemic.” With commodity prices on the upswing, there will be a strong temptation to rely on a rebound in resource revenues to get there, but the Kenney government simply cannot count on resource revenues to repair Alberta’s finances.

A reliance on non-renewable resource revenue has caused trouble for the provincial finances for decades—both in good times and bad—because of its sheer volatility and unpredictability.

Take oil prices. Within roughly the past year, West Texas Intermediate (the international benchmark) briefly turned negative and traded for more than $60 (US/barrel). While negative oil prices are unprecedented, it’s a stark example of underlying volatility and unpredictability in commodity prices.

More generally, non-renewable resource volatility can be seen throughout Alberta’s history. Over the past two decades (pre-COVID), non-renewable resource revenue accounted for as little as 6.5 per cent of total provincial government revenue (2015/16) and as much as 41.5 per cent (2000/01). And non-renewable resource revenues are notoriously difficult to forecast.

For instance, the Redford government projected an operating surplus (which excludes capital expenditures) in 2015/16 and 2016/17, after a period of routine deficits. In total, those surpluses banked on roughly $19.4 billion in non-renewable resource revenue, only $5.9 billion of which actually materialized—a shortfall of 70 per cent. Subsequently, Alberta instead ran budget deficits each year.

Similarly, the Notley government’s plan to balance the budget relied on non-renewable resource revenue to more than double between 2018/19 and 2023/24. But non-renewable resource revenues are not expected to be anywhere near levels the Notley plan would have required. For example, non-renewable resource revenue is projected to reach just $5.9 billion in 2023/24, compared to the $12.3 billion the Notley government would have needed.

Most recently, the Kenney government relied heavily on non-renewable resource revenue in its previous plan to balance the budget (pre-COVID) by 2022/23. All told, an increase in non-renewable resource revenue was to be responsible for half the government’s deficit-reduction plan. But again, much of those revenues are no longer expected to materialize. With the added fiscal impact of COVID, deficits are set to continue.

Interestingly, the government’s reliance on non-renewable resource revenues actually contributes to the deficit.

Consider the near fiscal crisis in the 1990s. A build up of resource revenues in the 1970s led governments to increase spending to levels that were unsustainable should those revenues decline. After adjusting for inflation, Alberta’s per-person government program spending (total spending minus interest costs) more than doubled from $5,000 in 1970/71 to 10,300 in 1979/80. Once the inevitable decline in non-renewable resource revenue occurred in the 1980s, Alberta incurred persistent deficits.

When commodity prices rebounded in the 2000s, successive Alberta governments fell back into the same pattern of using non-resource revenue to increase spending to unsustainable levels. And surprise surprise, when resource revenues took an unexpected decline in 2009/10, a second string of budget deficits emerged.

In the face of high commodity prices, the Kenney government must avoid the temptation to lean on non-renewable resource revenues to solve its fiscal problems. This strategy has proven too risky and unreliable time after time.