It’s like 1986 all over again. No, not just because skinny jeans are back in style or that Madonna is back on the pop charts, but because of the eerie similarities between the fiscal situation of the Alberta government in 1986 and of that today.
A quick refresher: Prior to 1986, energy prices were flying high, and had been high for a few years. Consequentially, the Lougheed government also enjoyed relatively high royalty revenues. Buoyed on by their fortune, the Lougheed government looked to spend. In fact, Premier Lougheed’s last budget in 1985 ramped up spending by 17.5 percent.
However, in early 1986, oil prices plummeted 61 percent over the period of three-months. This caused annual royalty revenues for the Alberta government to drop from $4.9-billion to $1.9-billion virtually overnight.
Fast forward to 2008, when energy prices were also flying high, and had been for much of the decade. In fact, royalty revenues for the Alberta government have averaged $11.8-billion per year over the past four years. And so the Stelmach government did what Lougheed had done before, and increased spending by 17 and 12 percent respectively in the last two budgets. Indeed, when adjusting for inflation and population growth, spending in the 2008-09 fiscal year is only a hair short of the sky-high government spending level in 1986.
Yet in 2008, just like in 1986, oil prices took a nose-dive. Oil plunged from $145/barrel to $41/barrel – a 72 percent drop over the past seven months.
While the royalty revenue situation today may be very similar to that of 1986, we do not know yet what the government reaction or the long-term impacts will be.
We do know, however, how the Alberta government reacted in 1986.
When newly elected Premier Don Getty took the reigns, he was handed a government who had a relatively small debt of $5-billion, but who had ramped up spending to record levels. He was also handed the bad news that oil prices had dropped and he was going to either have to run a deficit, raise taxes or significantly cut spending.
Getty chose a very minor cut to spending (3.7 percent), and to double Alberta’s debt by running a $5-billion deficit. Getty, undoubtedly, thought this was going to be a one-year blip and that a major cut in spending wasn’t necessary. He was wrong. Oil prices did not immediately rebound and eight consecutive deficit budgets eventually drove our provincial debt up to $23-billion.
Budget 2009 is around the corner, and Premier Stelmach has already indicated his government has no intention of cutting spending. They too think this will likely be a short-term blip in resource prices. This will leave them with three options, break the law and run a deficit, raise taxes, or dip into savings.
Yet, unlike the Getty government, the Stelmach government does have a small amount of money set aside, outside of the Heritage Fund. While it may seem odd to consider nearly $14-billion in Sustainability Fund and Capital Account funds “small,” given today’s spending levels, that money will be gone in two years.
In fact, if the Alberta government opts to increase spending from Budget 2008 by only 6 percent in 2009 – half last year’s spending increase – spending will hit $39.2-billion.
The Canadian Taxpayers Federation estimates total revenues next year could be roughly $36.5-billion. This will mean the government will need to withdraw $2.7-billion from their savings accounts to balance the 2009 budget. Add to that $3.8-billion promised to carbon capture and green transit projects, and the government is left with $7.3-billion left in the pot.
And, if oil and gas prices do not rocket skyward in 2010, and the Alberta government increases spending again, it will mean they will need to use most of the remaining savings to balance the 2010 budget.
From there, the problem becomes even worse. With no short-term savings left to cover the spending gap, the Stelmach government will have the same choice Getty had, to cut spending, raise taxes or go back into debt.
The point remains, had Getty reacted swiftly with a significant cut in spending in 1986, and a plan to wean his government off using royalty revenues for everyday spending, we wouldn’t have had eight consecutive deficits. Sloughing-off making the tough decisions and hoping for oil prices to rise didn’t work for Getty. He was eventually replaced by a premier who was prepared to make the inevitable spending cuts. Hopefully the same fate does not befall our current premier.