Alberta
Alberta government’s fiscal update underscores need for rainy-day account
From the Fraser Institute
By Tegan Hill
According to the Smith government’s recent fiscal update, the government’s $2.9 billion projected budget surplus has increased to a $4.6 budget surplus in 2024/25 mainly due to higher-than-expected resource revenue. But the resource boom that fuels Alberta’s fiscal fortunes could end at any moment and pile more government debt on the backs of Albertans.
Resource revenue, fuelled by commodity prices (including oil and gas), is inherently volatile. For perspective, in just the last decade, the Alberta government’s annual resource revenue has been as low as $2.8 billion (2015/16) and accounted for just 6.5 per cent of total government revenue. In contrast, according to the Smith government’s fiscal update, projected resource revenue is $20.3 billion this fiscal year and will account for more than a quarter (26.1 per cent) of total government revenue.
But here’s the problem.
Successive Alberta governments—including the Smith government—have included nearly all resource revenue in the budget. In times of relatively high resource revenue, such as we’re currently experiencing, the government typically enjoys surpluses and, flush with cash, increases spending. But when resource revenues decline, the province’s finances turn to deficits.
The last time this happened Alberta ran nearly uninterrupted deficits from 2008/09 to 2020/21 while the province’s net financial position deteriorated by nearly $95 billion. As a result, Albertans went from paying $58 per person on annual provincial government debt interest costs to nearly $600 per person.
So how can the Smith government avoid the same fate as past Alberta governments who wallowed in red ink when the boom-and-bust cycle inevitably turned to bust?
The answer is simple—save during good times to help avoid deficits during bad times. The provincial government should determine a stable amount of resource revenue to be included in the budget annually and deposit any resource revenue above that amount automatically in a rainy-day account to be withdrawn in years when resource revenue falls below that stable amount.
This wouldn’t be Alberta’s first rainy-day account. In fact, the Alberta Sustainability Fund (ASF), established in 2003, was intended to operate this way. A major problem with the ASF, however, was that it was based in statutory law, which meant the Alberta government could unilaterally change the rules governing the fund. Consequently, the stable amount was routinely increased and by 2007 nearly all resource revenue was used for annual spending. The ASF was eventually drained and eliminated entirely in 2013. This time, the government should make the fund’s rules constitutional, which would help ensure it’s sustained over time.
Put simply, funds in a resurrected ASF will provide stability in the future by mitigating the impact of cyclical declines on the budget over the long term.
In the recent fiscal update, the Alberta government continues to risk relying on relatively high resource revenue to balance the budget. To avoid deficits and truly stabilize provincial finances for the future, the Smith government should reintroduce a rainy-day account.
Tegan Hill
Director, Alberta Policy, Fraser Institute
From the Fraser Institute
By Tegan Hill
In February 2024, the Smith government promised to share a plan to grow the Heritage Fund—Alberta’s long-term resource revenue savings fund—with the public before the end of 2024. But 2025 is upon us, and Albertans are still waiting.
The Lougheed government originally created the Heritage Fund in 1976/77 to save a share of the province’s resource wealth, including oil and gas revenues, for the future. But since its creation, Alberta governments have deposited less than 4 per cent of total resource revenue in the fund.
In other words, for decades successive Alberta governments have missed a golden opportunity. When governments make deposits in the Heritage Fund, they transform onetime (and extremely volatile) resource revenue into a financial asset that can generate more stable earnings over time. Eventually, the government could use annual income from the fund to replace volatile resource revenue in the budget.
Historically, however, rules that would have helped ensure the fund’s growth (for example, a requirement to deposit 30 per cent of resource revenue annually) were “statutory” rather than “constitutional,” which meant Alberta governments could easily disregard, change or eliminate these rules once they were no longer convenient.
And they did. The government changed that 30 per cent requirement to 15 per cent by 1982/83, and after an oil price collapse, eliminated it entirely in 1987/88. Due to a lack of consistent deposits, paired with the real value of the fund eroding over time due to inflation, and nearly all fund earnings being spent, the Heritage Fund is expected to be worth less than $25 billion in 2024/25.
Again, while Premier Smith has promised to grow the fund to between $250 billion to $400 billion by 2050, we’ve yet to see how she plans to do that. Whatever plan the government produces, it should heed lessons from other successful resource revenue savings fund such as Alaska’s Permanent Fund.
The Alaska government created its fund the same year Alberta created the Heritage Fund, but Alaska’s fund is worth roughly US$80 billion (or C$113 billion) today. What has the Alaska government done differently?
First, according to Alaska’s constitution, the state government must deposit 25 per cent of all mineral revenues into the fund each year. This type of “constitutional” rule is much stronger than a “statutory” rule that existed in Alberta. (While Canada does not have separate provincial constitutions, it’s possible to change Canada’s Constitution for province-specific measures.) Second, the Alaska government must set aside a share of the fund’s earnings each year to offset the effects of inflation—in other words, “inflation-proof” the principal of the fund to preserve its real value. And finally, the government must pay a portion of fund earnings to Alaskan citizens in annual dividends.
The logic of the first two rules is simple—the Alaskan government promotes growth in the fund by depositing mineral revenue annually, and inflation-proofing maintains the fund’s purchasing power. But consider the third rule regarding dividends.
The Alaska government created the annual dividend, paid out annually to Alaskans, to create political pressure for future governments to responsibly maintain the fund. Because citizens have an ownership share in the fund, they’re more interested in the state maximizing returns from its resource wealth. This has helped maintain and reinforce robust fiscal rules that make the Permanent Fund successful.
Based on this success, if the Smith government began contributing 25 per cent of resource revenue to the Heritage Fund and inflation-proofed the principal, it could pay each Albertan a total dividend between roughly $600 to $1,100 from 2024/25 to 2026/27, or roughly $2,300 to $4,400 per family of four. And as the fund grows, so would the dividends.
Almost one year ago, the Smith government promised a new plan for the Heritage Fund. When the plan is finally released, it should include a constitutional requirement for consistent contributions and inflation-proofing, and annual dividends for Albertans.
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