Wednesday, September 26, 2007

C.D. Howe Institute Weighs in on the Alberta Royalty Review

I do not usually post news stories verbatim in this Blog. But in this case I wish to make an exception. If for not other reason that I am a Member of the C.D. Howe Institute (by way of disclosure) this piece brings forth some larger questions on the future of Alberta we need to start to discuss. Another quality think tank based in Alberta - the Canada West Foundation has also been posing this question for a couple of years now. I highly recommend the work of both of these organizations.


Alberta's Royalty Review Panel released its final report on September 18, 2007, which recommended increases in provincial oil and gas royalties, particularly as they apply to oilsands extraction. In a column in today's National Post, C.D. Howe Institute President and CEO Bill Robson wonders what Alberta would do with even more resource revenue.

Alberta's chronic overrunsNational Post Wed 26 Sep 2007

The release of Our Fair Share by the panel studying Alberta's oil and gas royalties has prompted a loud debate. No surprise, with the panel recommending that the province boost its energy-related levies by almost $2-billion annually. The panel's message that Albertans should get more from their fossil-fuel resources has overshadowed its proposals to rationalize and rebalance energy taxes and royalties, while an industry already struggling with escalating costs in the oilsands naturally views the prospect of higher levies with alarm.

Premier Ed Stelmach has promised a response to the Royalty Review Panel's recommendations by mid-October. Before the provincial government acts, however, it needs to answer a question that the controversy over the panel's report risks obscuring:What would it do with the extra money?

The yo-yoing of provincial spending in Alberta as fossil fuels boomed and busted in the 1970s, 1980s and 1990s underlines this question's importance. It is all very well for the report to emphasize that Albertans own their sub-soil resources. The fact is they can only exercise their rights as owners through their provincial government. While the ways the province might use these extra dollars --further increases in provincial programs, tax relief in other areas, or saving to prepare for a leaner future-- was not part of the panel's mandate, they matter greatly for the report's ultimate larger impact.

Those who recall Alberta's misadventures with its Heritage Fund and its deep fiscal retrenchment of the mid-1990s will know that Alberta has always had trouble handling resource revenues adeptly. Experience since the mid-1990s provides a fresh lesson. In successive budgets since 1996, the provincial legislature has voted spending increases averaging less than 2% annually. But the final figures for each fiscal year showed actual spending increases averaged almost 7%. These chronic overruns had a huge cumulative effect. Rather than the cumulative spending increase of $4.5-billion anticipated in budgets, provincial spending ballooned more than $15-billion over the period. The cumulative overrun of $10.5-billion is equal to all of the province's budgeted health care spending last year.

While all Canadian governments have had trouble living up to their budget commitments over the past decade, the record of Alberta's legislative assembly is uniquely bad. The tendency for resource revenues to outpace projections, and for in-year or end-of-year spending surprises to absorb most of the extra money, has been a driving force behind this breakdown of fiscal accountability. The 2007 budget anticipated no less than a 12% jump in spending for the
current fiscal year -- even before overruns, that would make provincial spending almost double what it was at the beginning of the decade. Raising the province's take from the energy industry by one-fifth, as the panel recommends, amid an energy boom will add fuel to the fire, increasing the prospects for yet another sizeable overrun -- and for a painful mix of tax hikes and spending cuts as demographic pressures and the resources boom's inevitable fade squeeze Alberta's budget in the years ahead.

This prospect highlights an obvious point: Some potential uses for any extra energy revenue are clearly smarter than others. Lower corporate income-tax rates would enhance Alberta's attractiveness to all kinds of business -- and mute the impact of new levies on the energy industry. More personal income-tax relief would help Alberta attract and develop the human capital that can sustain growth beyond the current energy boom. Saving the funds and investing them in a diversified portfolio outside Alberta would also prepare the ground for a future with less resource revenue.

None of these options, however, is likely to appear as compelling as more spending. The resource boom has created many legitimate needs for more infrastructure and public services in the province. Less happily, it has also fuelled a sense among many Albertans that resource wealth entitles them to the best of everything. Pumping more government money into a red-hot economy will further push up costs and inflame expectations -- setting Alberta up for an even more painful fall when the cycle inevitably turns.

For this reason, the provincial government should make a fiscal plan for any extra revenues resulting from the panel's recommendations a precondition for their implementation. Although a long delay would be terrible for energy investment in the province, no long delay is needed: another panel will be making recommendations on how Alberta might set resource wealth aside for the future before year-end. A few extra weeks would help in sorting out some individual royalty and tax recommendations -- not to mention explore some of the panel's more difficult proposals about long-term stewardship and upgrading incentives. And importantly, it would set the royalty-review recommendations in a vital wider context -- as a step toward ensuring that the current energy boom reinforces Alberta's future economic and fiscal base -- and alleviate the pressure to take more revenue now, and think about how to spend it later.

Those who think the debate's "fair share" rhetoric demands faster action should take a fresh look at the numbers. The Royalty Review Panel put the revenue impact of its recommendations at just under $1.9-billion annually through the end of the decade. Even if the depressing effects of the new levies themselves reduce the take, we are talking a lot of money. Yet spending overruns since 2003 alone have absorbed three times that much! When extra money vanishes so quickly, how strong is the case for more?
-William Robson is president and chief executive of the C.D. Howe Institute.

C.D. Howe Institute67 Yonge Street, Suite 300, Toronto, Ontario M5E 1J8Phone: 416-865-1904; Fax: 416-865-1866