’80s-Era Crisis Feared In Alberta; Premier Rejects Warning In U of C Report

Frontier Centre, Taxation, Uncategorized, Worth A Look

The Stelmach government is stuck in the same financial quicksand as the 1980s Getty era and is facing similar “dire consequences” of prolonged deficits and draconian spending cuts due to its over-reliance on energy revenues, warns a new University of Calgary study.

But as the Tory government prepares to table its first bud-get deficit in 15 years, Premier Ed Stelmach rejected the report’s assertions. The government will strike the right balance of belt tightening, he said, while maintaining strong core programs such as health care and education.

The report released Thursday by the U of C’s School of Public Policy, titled Will It Be Deja Vu All Over Again?, says the Tory government is on the edge of a financial precipice and must respond accordingly in Tuesday’s budget or risk repeating past mistakes.

Former premier Don Getty’s regime made two key errors in the mid-to late 1980s of relying too heavily on volatile oil and gas revenues to fund its budget, and then failing to cut spending accordingly when energy prices collapsed — instead hoping markets would rebound in the short term.

The Stelmach government is headed down an identical path, cautions the report.

“We criticize (the government) for allowing its budget to become so heavily dependent on volatile, energy-related revenues–that is a high-risk strategy; it has been tried before and has failed, with dire consequences,” the report states.

“It is a mistake the Alberta government must recognize and take steps to avoid as quickly as possible.”

Commodity prices have crashed at the same time the province has increasingly tapped its resource royalty cash to fund spending, while the government has delivered “worrying signs” that it will do little and wait for high energy prices to return, it notes.

The province must quickly reduce its budget gap — the difference between the amount it spends on programs and what it collects in revenue other than energy royalties and investment income, the report adds.

In fact, government estimates reveal the provincial budget gap (reliance on resource dollars) has returned to where it was before massive spending cuts were introduced during the”Klein Revolution” of the mid-1990s.

Stelmach called the study’s assessment “nonsense.”

“Look at our balance sheet,” he told reporters in Calgary on Thursday after a PC party fundraising dinner.

“We’re the only jurisdiction in North America that has cash in the bank–liquid. And had I listened to the very same economists, we would not have had that money in the bank,” he added, noting the decline in the value of long-term savings in the Heritage Fund.

In his speech to party supporters, Stelmach blasted critics who accuse his government of blowing though its resource revenues.

“They claim we’ve let the advantages of another boom slip through our fingers,” he added. “That’s just not true. Like many Alberta families, we’ve saved for the future and planned for the unknown.”

But depressed energy prices have gutted the province’s revenues and sent Alberta back into red ink.

The government has already announced it will incur a deficit of around $1.4 billion for the fiscal year that just ended–a precipitous drop from the $8.5-billion surplus predicted last summer as oil soared to a record$ 147 US per barrel.But the province’s revenue haul tumbled as fast as energy prices. Tuesday’s budget is expected to project another deficit for the 2009-10 fiscal year.

The U of C report argues the province will have to consider spending cuts and tax increases if it’s to wean itself off its addiction to royalty dollars– a bold recommendation when governments around the world are hiking their expenditures to stimulate faltering economies.

If the province doesn’t address the situation in Tuesday’s budget and future blueprints, Alberta could be forced to eventually reintroduce 1990s style spending cuts.

In an interview, U of C economist and report co-author Ronald Kneebone said the Stelmach Tories need a new fiscal anchor similar to what former premier Ralph Klein did when he vowed to eliminate the deficit and debt.

Liberal Leader David Swann said Thursday the Conservative government has not lived within its means and has blown Albertans’ oil riches.

“They’ve spent virtually all of our non-renewable re-source wealth. They’ve failed to lead the province toward a diverse and green energy economy.”