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Three challenges facing Alberta amid the province’s new economic reality

Albertans suffered through two years of acute economic and financial pain in 2015 and 2016, when the province had to cope with a deep recession caused by the collapse in global oil prices. Alberta's economy is rebounding, but the world has changed. The province has little choice but to change with it.

Alberta's recovery began late in 2016 and has continued at a robust pace in some important areas. The consumer is the backbone for most economies and Alberta is no exception. Consumption is projected by the Conference Board of Canada to increase by almost 4 per cent in 2017. Public sector investment is approaching 10 per cent growth this year. Rebuilding Fort McMurray after last spring's horrific fires is adding more than 0.3 per cent to 2017 provincial growth. But other parts of Alberta's economy continue to lag. Private investment is feeble, unemployment remains elevated and the overall recovery in jobs is not robust.

Moreover, the external economic environment for Alberta is not buoyant. Oil prices appear to be constrained at around $50 a barrel for West Texas intermediate. Natural gas prices are much more modest than a few years ago, with new domestic supply in the U.S. market slowly crowding out gas from Canada. The province's oil and gas is unable to reach international markets, as proposals to expand Canadian pipeline capacity run the gauntlet of regulatory approval and local politics in other provinces.

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Alberta is facing a new economic reality. We see three paramount challenges in the years and decades ahead: broadening the economic base, restoring and maintaining fiscal equilibrium, and adapting to climate change.

The first challenge is diversification of the economic base. Alberta has prospered for decades based principally on oil and gas exploration, investment and production, and its real incomes are the highest in the country as a result. But weaker international energy prices, increased U.S. competition and limits on market access all signal a need to modify the existing model.

While economic diversification is great in theory, it can be hard to do in practice. For Alberta, diversification could include expanding high-value services outside the energy sector and extracting more value from agriculture and other resources. This approach would mean relying relatively more on energy services, expertise and innovation, and less on oil and gas exploration and production. It certainly means maintaining and enhancing its high-quality and nimble work force. There is considerable room for modified diversification strategies across the province, in sectors, in cities large and small, and in rural regions. One size need not fit all.

Challenge No. 2 is restoring and maintaining a strong fiscal position. Much of the fiscal debate focuses on the size of the fiscal deficit during the two years of recession and the shift into indebtedness. While these immediate factors matter, Alberta is facing a bigger structural fiscal challenge. Its long-held low-tax environment has been possible thanks to a strong energy sector, with high incomes and profits, resulting tax revenues from business and personal income, plus significant energy royalties in good times. Alberta also could afford to spend more on public services and compensation than its neighbours – and it did.

In this new external environment, Alberta is now in debt like every other province. The fiscal plan will inevitably have to be revised. Using a large chunk of energy royalties to fund government programs meant a much smaller nest egg or investment fund from royalties – one which is now effectively gone in net terms. Future royalty earnings are likely to be less impressive. Spending will need to be managed more prudently and the tax base broadened. Tax increases are seldom popular, but options such as moving away from a flat income tax system, or even a broad sales tax, are due to be considered.

The third challenge is adapting to climate change. Contrary to some outside perceptions, Alberta has already made a good start in implementing broad climate change policies. A sophisticated two-tier carbon pricing system has been introduced for consumers and major emitters, which is a first step in broadening the tax base. A target cap for greenhouse gas emissions has been set. Lower-carbon transformation has begun – coal is being phased out for electricity production, and players in the energy industry are voluntarily expanding into renewables and lower-carbon energy sources.

This is still the "beginning of the beginning" for climate policy, and policy shifts are bound to happen in Alberta and elsewhere. But fundamentally, Alberta's future economic success and prosperity will be closely tied to its ability to adapt, and even provide leadership in a lower-carbon world.

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The bottom line? Adaptation and innovation will need to be core values if Alberta is to remain prosperous in the decades ahead.

Glen Hodgson is senior fellow at the Conference Board of Canada.

Video: Opinion: Alberta should be more like Mexico and hedge on oil
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About the Author

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada. More

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