The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.
You can’t say you weren’t warned. That’s a message that should be posted on billboards opposite the premier’s office in Edmonton, St. John’s and various other provincial capitals where falling energy prices have devastated government budgets.
Those of us who care about such things have been repeating for years the wisdom best summed up by former Alberta treasurer Jim Dinning: “Non-renewable natural resource revenues are non-reliable revenues.”
When your provincial budget is the attic in a house of cards, the first breath of contrary wind brings the whole structure tumbling down. I remember when a 10-cent difference in the price of natural gas meant a swing of $142-million in Alberta’s revenues. The price of that commodity has of course gyrated all over the place in the past 20 years, but mostly in a direction that has caused apoplexy at budget time.
The volatility of natural resource revenues is far less interesting than what might be done about them. On the other hand, if you can’t get policy makers to grasp the fragility of their budgets, you will never get them to take the hard decisions necessary to put things on a sounder footing.
For clarity’s sake, let’s recognize right away that the problem isn’t with income, sales and business taxes. Those too are subject to ups and downs, but a diversified economy will usually have sectors that are thriving and others that are declining. Taxes that apply to the broad-based and infinitely renewable activities of the whole population (like working and consuming) are the proper foundation for public finances.
The problem arises when a major part of your government income is derived from the sale of natural resources owned by the state. Because it is subject to huge and unpredictable price swings, the biggest risk in managing resource wealth is treating the money as if it is a reliable and stable revenue stream that will last forever. It isn’t.
Big price jumps in good years create huge expectations in the population and within the government. Alison Redford got into such trouble in Alberta partly because she spent as if high-priced oil was a permanent fact of life, so a few deficits here and there, even on a startlingly large scale, didn’t matter.
For the rest of this column, click here: http://www.theglobeandmail.com/report-on-business/rob-commentary/rob-insight/provinces-making-bad-bets-with-resource-based-budgets/article22363778/%3bjsessionid=t50lJJLP9Wg0sJW1bCPbLt2Vh9wKtynMPPg8Q6jtv4tFDb82YJXh!-594587501/?ts=150128110217&ord=1