The “bubble” is not in bitumen

Blog, Energy, Healthcare, Information Technology, Marco Navarro-Genie, Poverty, Role of Government, Uncategorized

I once heard a wise man say that governments are always wrong when making economic predictions.  The questions to consider are by how much, and in what direction?

That the Government of Alberta was wrong in its economic predictions should therefore not be big news.  But they were wrong by lots and widely in the wrong direction.  Alberta was predicting averages around $99 a barrel for the past year.  But it was not that prediction that got them in trouble, now facing a likely deficit near the $6 billion mark.

It appears to be the failure to account for the rising price differential –the difference between market prices and the bargain basement price Alberta needs to sell its oil to the United States because of our lack of pipeline capacity to deliver to markets. It’s what the premier called  a “bitumen bubble.” The price differential is not new, and for more than a year, economists were predicting a larger gap unless greater capacity to carry oil to market were developed.

The core of the problem lies elsewhere, whatever the premier says: Two successive Alberta governments for close to a decade have now been unable to balance their budgets at times when oil revenue was riding high.  When money abounds and one still runs out of it, it is a clear indication that the problem is not revenue. The problem is spending.

alison-redford

Jack Mintz from the School of Public Policy and other keen observers had predicted that we would be at this precise junction around this time.  Keep spending more than you have while you bridge gap with a supply of money the flow of which you cannot control, and it is not difficult to see that when the gap-closing supply goes down so does your ability to keep spending in the same undisciplined way.

And down that hole we now go, raising the spectre of budget cuts and higher taxes. Not quite a cliff, as a friend of mine joked, but surely a Buffalo jump. Yet, the government is still not facing reality for all the reality facing it.

In her televised address last week, the premier keeps promising not to raise taxes, and not to reduce the budget lines of the two largest spending departments, healthcare and education, to deal with the $6 billion gap.  Fair enough, but the promise to start putting savings into the Heritage Fund quickly gave her talk a hue of unreality.   

Without energy revenues, Albertans can’t afford upward of 30 per cent of what their government keeps spending on, and given that energy prices fluctuate Albertans are continuously at the mercy of those fluctuations.

But the worst problem, which compounds the fluctuating resource revenue, is the problem of politicians willing to treat the vast sums of resource revenue when the revenues do flow, as their near-private playground.  The problem of the income gap can be settled through stable taxation. The problem of the spending addiction at the top does not have an evident solution, however, since the spending addiction of politicians mirrors the addiction of getting more and more from less found in the population.

A generation ago, prior to the popular addiction, Peter Lougheed’s government began paving the way to bring some stability. He pushed a three-pronged strategy of rationalising spending, diversifying and saving.

While the provincial economy has made progress and is more diversified today than it was 30 years ago, Alberta is still largely dependent on revenue from oil and gas resources.  The  strategy of savings has been disastrous because Lougheed did not foresee or was unwilling to protect the Heritage Fund against politicians looking to buy popularity or buy their way out of their poor planning and mismanagement.

The savings strategy has also failed because all but one government since has not exercised restraint in spending.  One has to spend less than one receives in order to save. One has to have savings. That makes Premier Redford’s promise to save now in a time of deficit the more enigmatic.

Thus, a combination of spending beyond our means (and of not being able to save enough) and then spending without discipline the modest savings we did achieve undermined the very fund that was supposed to serve as stabilizer. Albertans have made no systematic or substantive public savings in a generation, during times when oil reached record prices.

The Redford government appears not to have grasped the Lougheed’s strategy. Nor does it appear to have learned much from the lessons of prudence in the hardships of the Klein heritage.  One cannot spend and continue to spend carelessly without at some point being stopped by the hard economic realities of not having endless supplies of money.

We’re here again.  It’s the familiar place of failure to account for economic reality.  If there is a bubble to be blamed, it is not in the bitumen.