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Globe editorial: Alberta can’t rely on oil revenues forever. But it’s going to try

In Alberta, the provincial economy has stalled, unemployment is high and debt is piling up. The left-wing NDP government is struggling to respond to the downturn, and the two right-wing parties, Wildrose and the Progressive Conservatives, are desperately trying to unite before the next general election in two years. Turbulent times.

All of this, however, masks the only real issue: the price of crude oil.

It's never really about party politics in Alberta. The leanings of the party in power two years ago, now or in two years from now – left, right, centre, socialist, green, libertarian, pirate, you name it – is largely irrelevant to the province's economic fortunes.

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This is not meant to be dismissive of the province's vibrant political culture. But as the NDP government's recent budget demonstrated, there is only one Albertan political philosophy, and it is this: We've got oil. Lots and lots of oil.

In Alberta, non-renewable resource production – the vast majority of it oil – creates tens of thousands of jobs, builds cities, fuels economic growth and pumps billions into the treasury in the form of royalties. It is a creative economic force.

But it is also a destructive political force – at least when it comes to the imaginations of premiers and finance ministers.

Time and time again, governments have promised to wean Alberta off oil and gas revenues, diversify the economy, and sock away royalties for the future. Over and over, Albertans have been told that, this time, Edmonton will not piss away the windfall from a surge in crude prices, to paraphrase a popular local bumper sticker.

But it never happens. Provincial governments since the 1970s have consistently chosen to feed at the trough of oil revenues instead of making difficult, long-term decisions. Consequently, government revenues depend to an unhealthy degree on non-renewable resource royalties, most of which are tied directly to the global price of crude.

This historic lack of foresight and discipline means the province has built very little elasticity into its financial regime. When the price of crude falls dramatically, as it did in the 1980s, in the late 1990s, in 2001, in 2008 and again in 2014, governments can only watch helplessly as their revenues collapse.

The current price drop has been typically catastrophic. Royalties fell from $8.9-billion in 2014-15 to $2.8-billion last year – a gigantic shortfall for a province facing a deficit of $10.3-billion this fiscal year.

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The problem is that successive governments have consistently avoided exploiting traditional revenue sources that are stable, and over which they have some measure of control.

Unlike other provinces, for instance, Alberta has never had a provincial sales tax that the government can adjust to match economic times. Just this week, Saskatchewan announced it will raise its sales tax one percentage point and apply it to more goods in order to help balance its reliance on resource revenue.

Alberta has also used royalty revenues to keep income and corporate taxes comparatively low – the so-called "Alberta advantage." The NDP government has raised taxes somewhat, but at a steep political price. Albertans tend to see their low taxes as a birthright, which is not easily messed with.

The province has also failed to put enough money in its rainy-day account. Its Heritage Savings Trust Fund was worth $17.7-billion in 2016. Norway, another economy that is deeply dependent on non-renewable resource royalties, has socked away $1.1-trillion.

As a consequence, the government's only real option when the price of crude drops has been to take on debt through deficit spending in order to maintain programs and services. Sometimes the price drops have been brief enough that previous surpluses covered the shortfalls, and sometimes the province has accumulated debt.

Whatever its borrowing, Alberta has always had an exceedingly low debt-to-GDP ratio, even at the worst of times. Other provinces would love to have such low ratios.

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Even so, debt, like taxes, is seen very poorly in Alberta, a mantra reinforced by the Progressive Conservative Party that ruled for 44 straight years until the NDP was elected in 2015, in the midst of the latest downturn.

When Ralph Klein became premier in 1992, his response to the debt accumulated as a result of the price collapse of the 1980s was to slash government spending, wait for oil prices to rise again – which they did, spectacularly – and wipe out the red ink. The province's infrastructure was left unattended, however.

The response to the current price collapse by the NDP government has been different, but also the same. Premier Rachel Notley intends to maintain much-needed infrastructure investment in her fast-growing province, which means Alberta will accumulate debt of $70-billion by 2020. But don't worry, Ms. Notley says: The price of crude will rebound, revenues will explode, surpluses will return and the debt will disappear. Just like always.

She may be right. But even if she is, some day there will be another price drop. As Albertans debate whether they are better off with the NDP or a right-wing hybrid party, they might want to ask themselves a question: How much longer can they afford to elect governments that fail to develop the kinds of stable revenue mechanisms – a sales tax or higher income taxes, notably – that can help smooth out the rough patches and keep the province moving forward in hard times?

One day, in the predicted "post-carbon age," demand may be so low that the price will permanently collapse. What Alberta needs is a politician with the courage to tell people that they can either pay their own way now, or leave those costs to subsequent generations that will not be blessed with money that can be dug out of the ground. Whether that politician is on the left or right will be a moot point.

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