Myth of energy-induced booms and busts

There is a prominent view among some in Alberta’s provincial government and elsewhere in the province that believes booms and busts in government finances are a result of the province’s large energy sector. Indeed, a growing number of Albertans seem to have bought into the idea that jurisdictions blessed with large energy sectors are doomed to large swings from surpluses to deficits when energy prices fluctuate.

This myth, which is too often conveniently encouraged by politicians, is easily tested by comparing the performance of Alberta with other energy-producing provinces and states. After all, Alberta is not the only province or U.S. state with a robust energy sector.

Consider a recent study that compared the economic and financial performance of Alberta with nine other Canadian provinces and U.S. states that have significant energy sectors. On a host of economic measures, such as GDP growth, per capita income growth, job creation, and unemployment, Alberta is among the elite within the energy-producing club of provinces and states, ranking high on every measure.

Albertans have enjoyed an incredibly robust economy over the past decade in no small part due to their energy sector. However, it is with respect to government finances that Alberta performs shockingly poorly compared to the other energy-producing jurisdictions.

On the issue of balancing budgets, for instance, Alberta is one of only three jurisdictions to be in deficit for the most recent year of comparable data (2011-12). Alberta’s deficit stands in stark contrast to the 9.7 per cent surplus (as a share of spending) observed in Texas, an established energy-producing state and North Dakota, a newbie to large-scale energy-production, which recorded an incredible 46.4 per cent surplus.

The recent drop in oil prices, given Alberta’s reliance on oil royalties for revenue, means its fiscal position is only likely to get worse.

To gauge the degree of reliance on energy-related revenues and the implication of changes, see what happens when we remove energy-related revenues from government revenues. Only Alaska performs worse than Alberta. In fact, Alberta records the second largest deficit when resource revenues are removed while Texas and North Dakota both remain in surplus.

The main explanation for deficits in Alberta is consistently large spending increases. Over the decade ending in 2011-12, Alberta recorded the fourth highest level of per capita spending among the 10 energy-producing provinces and states analyzed. Spending in Alberta was well ahead of both North Dakota and Texas.

A common justification for such spending is that Alberta has experienced a marked increase in its population. There are two problems with this excuse. One, the data presented are on a per person basis, which means they account for population growth. And two, Alberta’s population growth of 29.4 per cent between 2000 and 2012 is comparable to Texas’ growth of 24.4 percent. North Dakota’s population has also grown markedly although not to the extent of Alberta or Texas.

One critical solution to the booms and busts of Alberta’s government finances is a more disciplined approach to spending. Embedding rules that prevent runaway spending in good times so that large disruptions in government programs and/or tax increases are avoided in tough times must be a central part of the fix.

For instance, stringently limiting program spending increases to the rate of inflation plus population growth would have resulted in a dramatically different fiscal circumstance for Alberta. Specifically, Alberta would have spent $41 billion less than it did over the 2004-05 to 2012-13 period according to a recent study. This means the province would still have a large rainy day account and the precipitous drop in the price of oil would not have the dire financial consequences facing Edmonton currently.

Alberta is not doomed to boom and bust government finances. There are fixes but they require leadership from government.