An Argument for a Deficit, Part 2: the Financial Side

I my last episode, I tried to establish an historical rationale for Alberta's current deficit. In sum, I had tried to make the case that our deficit is largely the result of the historical neglect of government investment. I have since realised I needed go deeper into certain areas of Alberta's history to increase the strength of my argument, and this post is such an attempt. I feel that the finances of the Alberta government demand more scrutiny; so too does an examination of the Alberta government from the day it paid off the debt to its defeat in May 2015. We'll leave the latter for later, and dive into Alberta's crappy fiscal situation - one the NDP inherited, rather than created.

Alberta's Deficit History

It may be popularly believed that deficits started with the NDP, but a quick examination of budget tables (like this one: http://www.rbc.com/economics/economic-reports/pdf/provincial-forecasts/prov_fiscal.pdf) reveal the provincial government had only run a single budget surplus since 2008. That, of course, was the year of the likely misnamed "Great Recession." Is the Great Recession wholly to blame for Alberta's running deficits from 2008 to the present?

Alberta Government Priorities

During the 1990s, Alberta had cut the budgets of its services both broadly and deeply in the name of fighting a "debt crisis." The revival in the price of both Oil and Natural Gas in the mid-1990s allowed the government of Alberta to defeat this boogeyman in no time once-soever - this partially because the debt was never that big to begin with.

Having eliminated the provincial debt, the government was faced with two courses of action. It could either play catch up in its massive infrastructure deficit, which I discussed earlier, or it could use its fiscal wiggle room to cut taxes. Of course there were other possibilities, like investing surpluses into the Heritage Fund - but I doubt this was ever a serious priority. Using debt to finance the "catch up" was totally out of the question, so budget surpluses would have to provide the funding for Alberta's myriad issues, something even the great surplus of 2007 was likely inadequate.

It should be remembered the make-up of the Alberta government in the later Klein years, and before the rise of the Wildrose Party. The PCs were the dominant political party in Alberta, but they dominated the over-represented countryside, while the cities were more of a competition with the Liberals and NDP (and later, Alberta Party). So while the PC Association was as big a tent as one could imagine, the center of gravity for the government actually lay in its rural representatives - who would one day be replaced by Wildrose MLAs.

It is probably not surprising then that the Alberta government, having defeated the debt, listed through a series of tax cuts, as this was most agreeable to the future Wildrose heartland. Alberta was a cheap place to have a business, and be rich. Money was indeed invested in infrastructure - but a drive across the province will reveal where most of the money went: rural ridings, with hospitals, airports, paved roads and new schools, while cities languished. The tax cuts did come at a steep price: billions of dollars in stable revenue each year, lost; and Alberta made itself more vulnerable to a danger looming on the horizon.

The Transition to Oil Sands Oil

Revenue from oil royalties, land sales and leases began to make up more and more of Alberta's government revenue. The rise in oil prices to record highs in 2008 masked a great transition underway in the province. Natural gas revenue had already disappeared with the cratering of its international price - and now oil was going the same way. Obviously, not because oil was worthless, but because of the royalty rules the government had established in the past.

To encourage development in the Oil Sands, the government had granted very generous concessions to oil companies investing in the province. These concessions allowed companies to recoup 100% of their investments before the Alberta government would begin to receive a share of the investment, a share that was considerably lower than the royalty levied on "conventional" oil.

Around 2007, the new Premier, Stelmach, was faced with a dilemma. In our rush to exploit our resources as rapidly as possible, we had exhausted the majority of our conventional oil reserves. As most of Alberta's oil production now came from the unconventional oil sands, the province was poised to lose billions of dollars in revenue as oil royalties disappeared in the short term. Accordingly, he began a royalty review. The result was no increase in oil royalties, but a whole lot of corporate support going behind the Wildrose Party.

So Alberta began a series of deficits. These were masked by the global economic crisis - but I encourage you to examine the graph I linked to above. You will see other oil exported provinces were running surpluses while Alberta was mired in deficits. Something uniquely Albertan was occurring.

The Latest Collapse

When Jim Prentice became the Premier of Alberta, he too was faced with a dilemma. The price of oil was imploding, thanks to price manipulation out of the Middle East and the American Shale boom. The Shale boom had done Alberta a massive disservice by eliminating our only real customer: the United States. Alberta had all this oil, and nowhere to sell it.

Investment was already plummeting and people were being laid off when he admitted that his government was going to have to raise taxes, cut services, and still run a deficit over $5 billion. He acknowledged the province was on a "resource roller coaster" (viewable here http://www.macleans.ca/wp-content/uploads/2016/04/fig1-1.png) and it needed to get off. Then he lost the election and disappeared.

A Downturn Like No Other, or where we are today

The NDP inherited a massive mess when it took office. The tax increases they effected did little to fight the size of the deficit, as the hole left by cratering royalties and leases destroyed any chance they had of balancing the budget. Further, they realised they did have to spend money in order to prevent the damage from spreading from the oil sands and overwhelming the rest of the provincial economy. Cutting provincial employees and services would not only stress communities further, but would also encourage the spread of the oil collapse throughout the province.

The largest employer in Alberta was not the natural resources industries, but construction. The decline in oil sands in activity had already put tens of thousands of workers out of work, but as many were "fly-out" workers from elsewhere, their absence was mostly felt in Alberta's busting hotel industry. There was a significant danger to the province if more of these people lost their jobs. Their unemployment would lead to a bigger housing bust, bigger out migration, increased government costs, and likely more crime (as was experienced in Edmonton). The bad wave coming from the oil sands would only get bigger as it picked up construction workers and laid them off.

It wasn't that long ago that the heads of Alberta's construction industry stated they would be out of work to do by this year. Fortuitously, there is a government willing to spend to keep these people working. As I've argued elsewhere, the government is leading a charge on infrastructure that should have been done decades ago. So, while the recession is the worst since the 1980s - the province is experiencing, in contrast, a lower unemployment rate and a lower emigration rate. As an added bonus, that debt the government is raising is cheaper than the debt it was being burdened with in the 1980s by several orders of magnitude.

There was simply no way of avoiding a budget deficit. Past inaction had cursed the Alberta government, regardless of who is premier, with one. Albertans elected the party that promised to do the most to get Alberta off the "resource roller coaster," and the party that promised to rebuild the province. They are trying to that - we shouldn't be surprised it comes with a price.

Thanks for reading.