Alberta's Gas City sparking light of fiscal responsibility
It’s tough for politicians to balance budgets so it might seem far-fetched to believe they can actually save money. But Medicine Hat’s politicians are doing it. By creating their Heritage Savings Reserve to steward resource revenues, the Gas City has sparked a light of fiscal responsibility for Alberta to follow.
Medicine Hat has an abundance of energy resources. The city has over 4,000 gas wells and ambitions to increase its oil production to 5,000 barrels per day. When energy prices are high, it’s great. But when prices slump, they leave a crater in the city’s budget and politicians try to fill that hole by increasing taxes at the worst possible time. Sound familiar?
Medicine Hat has committed to stepping off the resource-price roller-coaster through the creation of its very own Heritage Savings Reserve, a fund which will save 50 per cent of the city’s energy dividends. The brains behind the city’s glowing example of fiscal sustainability is Mayor Ted Clugston, who started pushing for a heritage fund after becoming a councillor in 2007.
He pushed for the fund and failed in 2009. He pushed and failed again in 2012. After a decade of perseverance, Medicine Hat’s city council finally agreed to create the resource savings fund in 2017.
“It’s been nine and a half years for me, but I’m happy,” said Clugston after council approved the Heritage Savings Reserve.
The fund has grown to over $20 million after an initial installment of $1 million only a few years ago.
“We could separate from the world, and we’d be totally self-sufficient,” Clugston told the New York Times, who covered the creation of Medicine Hat’s resource fund. It ties the small Alberta city of fewer than 70,000 people with Norway, which has a similar fund in place. “We’d be a very, very wealthy little country,” continued Clugston.
The province of Alberta also has the Heritage Fund, which was created to stop governments from throwing money away in the boom years and provide extra cash to cushion the bust years, but politicians looted it. The value of the Heritage Fund is now less than it was three decades ago after accounting for inflation.
When Alberta’s resource revenue boomed, the government’s spending soared. The Progressive Conservatives doubled program spending during boom years between 2004 and 2015. There’s an old-adage: “work expands to fill the time available for its completion.” With government, spending increases to meet higher revenues.
Politicians spent like drunken sailors when times were good. But here’s the problem – when Alberta’s resource revenues tanked, the government’s spending still soared. Since 2014, the government’s non-renewable resource revenue shrank by 39 per cent. Yet spending increased by over 16 per cent.
“For the past 50 years seven consecutive Alberta governments from three political parties have ramped up spending during years of high [non-renewable resource revenue], and then have run deficits when oil and gas prices inevitably declined,” explains Ted Morton, former Alberta finance and energy minister.
Instead, the provincial government needs to follow The Gas City’s example and start saving. We’re blessed with the golden goose of oil reserves – but only if we use it wisely. Other jurisdictions have proven that resource funds can be successful.
While our politicians have pillaged the Heritage Fund, Norway’s fund (which was created more than a decade after Alberta’s) now holds $1 trillion. If Alberta followed Norway’s example, and saved 100 per cent of its non-renewable resource revenues, contributions to the Heritage Fund would have been $170 billion rather than $9 billion between 1982 and 2011, according to the Fraser Institute. How’s that for a safety net?
Alberta’s politicians have squandered billions in resource revenues and racked-up serious damage on the provincial credit card. Alberta needs a strict heritage fund to control spending in the good times and make sure savings are there for bad times. If Medicine Hat can do it, so can the province.
This column was originally published in the Calgary Herald on August 24, 2014.