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.
A discussion of politics, science, emerging technology, and international affairs all centred on Alberta.
Showing posts with label Ed Stelmach. Show all posts
Showing posts with label Ed Stelmach. Show all posts
Tuesday, 30 August 2016
Saturday, 30 July 2016
Alberta's Perfect Storm, Part 2
Last time I looked at some of the ways Alberta's economic pillar, the fossil fuel industry, was recently affected negatively by a combination of technological change, competition and strategic interference. However, to understand the present economic bust more fully, we need consider more than the industrial side of things, but the human side, too. Unfortunately, much of the province's suffering today is result of poor choices made by people in government, and in their private lives, as it is a matter of circumstance. Accordingly, I believe much of what has happened was avoidable, as our predicament was predictable, but our leaders, and our selves, failed us.
To be gentle, we should start by considering the failings of the PC government.
The most common complaint about the past government is that they failed to plan for the future. This is a big charge, made up of two major components. The first is that they failed to save for days like this. Another component is that they failed to diversify the economy.
On the first charge, that they failed to save, rings all too true. The PCs, from Klein to Redford will forever be condemned as both reckless and irresponsible. The Province's Heritage fund was left to stagnate, left undisturbed since the downturn of the 1980s. Since that downturn, Alberta had paid off its debt, and was in the position, I remember, "to pay off the debt of other provinces, so long as they promised never to go into debt again" (this was actually argued in the National Post over a decade ago). Instead, the government cut taxes on the rich, on corporations, and on royalties.
That the tax cuts favoured the rich is undeniable; a flat tax, set at the relatively high rate of 10%, were you poor, or the incredibly low rate of 10%, were you rich, was a massive giveaway of billions of dollars a year in revenue. It needs be remembered, for all time, that tax cuts for the rich were very much in vogue in the English speaking world of the early 2000s, but that just serves to reinforce how shortsighted these governments were globally. Now tax cuts in general are not necessarily bad things; I would argue though that you can't afford them when people are dying in your hospital waiting rooms, and the insane are being put out on the streets. The only thing that made these tax cuts doable were the high revenues the province received from natural gas, gambling, and oil, the complicity of the province's media, and the wishes of the voters, in that order.
Cutting taxes on corporations remains popular today; probably because all of our news media comes from blatantly self-interested media corporations. However, even I feel that this may have been a good idea at the time. Low taxes do attract new businesses; but it can be seen that this did not happen in Alberta for other reasons, which I will explore later. The companies we did have, those incredibly profitable corporations of Alberta, were able to save their profits, and if you look who owns what, remove them from the country altogether.
The cut in the rate of oil royalties was actually more of an accident than a deliberate giveaway. Still, the story that can be told tells the same story of moral cowardice as before. Royalties dropped because Alberta had two different kinds of royalties: one for conventional oil, and one for the oil sands. Like the rest of Earth, Alberta's conventional oil was cheap to access and of good quality. Accordingly, the government in the distant past effected a decent royalty rate. Cheap access and good quality are two characteristics lacking in the oil sands. The Oil Sands are so inaccessible that for many years the best plan for getting at the stuff was by nuking the ground around Fort McMurray, a plan approved by Premier Manning's government (more amazingly, the Soviet Union actually did this on its own soil). As for quality, the oil sands are so bad they require much refining before even becoming as good as conventional oil; hence the much lower price it fetches internationally. So, to encourage development of the oil sands, the government set royalty rates low, and provided further generous incentives to oil sands companies. The drop in oil royalties basically reflects the historical depletion of Alberta's conventional oil sources, and their replacement by the oil sands.
Now the moral cowardice. Premier Stelmach inherited the government around the time the oil sands displaced the conventional sources as Alberta's economic (and revenue) driver. He proposed a royalty review meant to address the discrepancy between the oil royalties. In those days the price of oil was galloping towards $150US a barrel, and if your Calgary based oil company wasn't insanely profitable, there was something terribly wrong with it, or more likely, you. Nonetheless, the royalty review was aborted, with the specious claim the royalties were fine. The only thing to come from the whole situation was that Alberta's oil companies threw their financial weight behind the offshot of the wilting Social Credit Party: the Wildrose Alliance.
During the Stelmach years, investment poured into the Alberta Oil Sands. The Province's economic growth and population growth were simply stunning. Already, though, problems were becoming apparent. Things were simply too good. The low tax regime adopted by the province undoubtedly encouraged the mass migration and investment we received (reducing regulations also helped, no doubt). It also encouraged massive inflation; at one time, the poverty line in Fort McMurray was an income of over $60,000 a year.
The government lacked the resources to keep up with the growth. Whole neighbourhoods were being built with no schools, community centres, parks. Calgary didn't get a new high school for 15 years, while the population increased by the hundreds of thousands. During the last election, one friend ran in a Northwest Calgary riding. I was astonished that it had as many schools - six - as the 60 year old community I reside in. There was a lack of hospitals, schools, teachers, doctors, nurses - there was a shortage of almost everything necessary for society to run.
There is perhaps a development lesson here. I feel the lesson is don't encourage more development than you can pay for or keep up with. The Alberta governments reckless tax cuts blew up a bubble economy, while reducing its ability to keep pace with it. And all the while, they didn't save a dime. Former Premier Lougheed criticized the government for its haphazard economic development. One think tank went so far as deem Alberta the province with the worst fiscal outlook in the country.
Why did economic diversification fail? Deregulating the electricity markets didn't help. Experts say it has cost the province's people and businesses $20 billion since it was implemented. This alone may not have been fatal to Alberta's other industries, but the massive economic growth in the province drove up rents and leases, too. The last nail in the coffin of Alberta's economic diversification was the success of the Oil Sands itself. One could simply make so much money, so fast, regardless of your passions or qualifications, that almost all the province's energies and talents were sucked into the oil sector. This was not a bad thing at the time, but were something to happen to oil, we would definitely be in an uncomfortable position.
And here we are.
I realize I have spent too long bashing the government. The people of Alberta deserve a shake too. Next time.
Again, thanks for reading.
To be gentle, we should start by considering the failings of the PC government.
The most common complaint about the past government is that they failed to plan for the future. This is a big charge, made up of two major components. The first is that they failed to save for days like this. Another component is that they failed to diversify the economy.
On the first charge, that they failed to save, rings all too true. The PCs, from Klein to Redford will forever be condemned as both reckless and irresponsible. The Province's Heritage fund was left to stagnate, left undisturbed since the downturn of the 1980s. Since that downturn, Alberta had paid off its debt, and was in the position, I remember, "to pay off the debt of other provinces, so long as they promised never to go into debt again" (this was actually argued in the National Post over a decade ago). Instead, the government cut taxes on the rich, on corporations, and on royalties.
That the tax cuts favoured the rich is undeniable; a flat tax, set at the relatively high rate of 10%, were you poor, or the incredibly low rate of 10%, were you rich, was a massive giveaway of billions of dollars a year in revenue. It needs be remembered, for all time, that tax cuts for the rich were very much in vogue in the English speaking world of the early 2000s, but that just serves to reinforce how shortsighted these governments were globally. Now tax cuts in general are not necessarily bad things; I would argue though that you can't afford them when people are dying in your hospital waiting rooms, and the insane are being put out on the streets. The only thing that made these tax cuts doable were the high revenues the province received from natural gas, gambling, and oil, the complicity of the province's media, and the wishes of the voters, in that order.
Cutting taxes on corporations remains popular today; probably because all of our news media comes from blatantly self-interested media corporations. However, even I feel that this may have been a good idea at the time. Low taxes do attract new businesses; but it can be seen that this did not happen in Alberta for other reasons, which I will explore later. The companies we did have, those incredibly profitable corporations of Alberta, were able to save their profits, and if you look who owns what, remove them from the country altogether.
The cut in the rate of oil royalties was actually more of an accident than a deliberate giveaway. Still, the story that can be told tells the same story of moral cowardice as before. Royalties dropped because Alberta had two different kinds of royalties: one for conventional oil, and one for the oil sands. Like the rest of Earth, Alberta's conventional oil was cheap to access and of good quality. Accordingly, the government in the distant past effected a decent royalty rate. Cheap access and good quality are two characteristics lacking in the oil sands. The Oil Sands are so inaccessible that for many years the best plan for getting at the stuff was by nuking the ground around Fort McMurray, a plan approved by Premier Manning's government (more amazingly, the Soviet Union actually did this on its own soil). As for quality, the oil sands are so bad they require much refining before even becoming as good as conventional oil; hence the much lower price it fetches internationally. So, to encourage development of the oil sands, the government set royalty rates low, and provided further generous incentives to oil sands companies. The drop in oil royalties basically reflects the historical depletion of Alberta's conventional oil sources, and their replacement by the oil sands.
Now the moral cowardice. Premier Stelmach inherited the government around the time the oil sands displaced the conventional sources as Alberta's economic (and revenue) driver. He proposed a royalty review meant to address the discrepancy between the oil royalties. In those days the price of oil was galloping towards $150US a barrel, and if your Calgary based oil company wasn't insanely profitable, there was something terribly wrong with it, or more likely, you. Nonetheless, the royalty review was aborted, with the specious claim the royalties were fine. The only thing to come from the whole situation was that Alberta's oil companies threw their financial weight behind the offshot of the wilting Social Credit Party: the Wildrose Alliance.
During the Stelmach years, investment poured into the Alberta Oil Sands. The Province's economic growth and population growth were simply stunning. Already, though, problems were becoming apparent. Things were simply too good. The low tax regime adopted by the province undoubtedly encouraged the mass migration and investment we received (reducing regulations also helped, no doubt). It also encouraged massive inflation; at one time, the poverty line in Fort McMurray was an income of over $60,000 a year.
The government lacked the resources to keep up with the growth. Whole neighbourhoods were being built with no schools, community centres, parks. Calgary didn't get a new high school for 15 years, while the population increased by the hundreds of thousands. During the last election, one friend ran in a Northwest Calgary riding. I was astonished that it had as many schools - six - as the 60 year old community I reside in. There was a lack of hospitals, schools, teachers, doctors, nurses - there was a shortage of almost everything necessary for society to run.
There is perhaps a development lesson here. I feel the lesson is don't encourage more development than you can pay for or keep up with. The Alberta governments reckless tax cuts blew up a bubble economy, while reducing its ability to keep pace with it. And all the while, they didn't save a dime. Former Premier Lougheed criticized the government for its haphazard economic development. One think tank went so far as deem Alberta the province with the worst fiscal outlook in the country.
Why did economic diversification fail? Deregulating the electricity markets didn't help. Experts say it has cost the province's people and businesses $20 billion since it was implemented. This alone may not have been fatal to Alberta's other industries, but the massive economic growth in the province drove up rents and leases, too. The last nail in the coffin of Alberta's economic diversification was the success of the Oil Sands itself. One could simply make so much money, so fast, regardless of your passions or qualifications, that almost all the province's energies and talents were sucked into the oil sector. This was not a bad thing at the time, but were something to happen to oil, we would definitely be in an uncomfortable position.
And here we are.
I realize I have spent too long bashing the government. The people of Alberta deserve a shake too. Next time.
Again, thanks for reading.
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