Alberta dug own financial hole
Texas had same oil boom, but less pain of price crash, report finds
While Alberta and Texas both enjoyed 10-year economic booms thanks to high oil prices, the province’s “undisciplined” budgets during those years left it in a worse financial position than the state when crude tanked.
In a study titled “One Energy Boom, Two Approaches,” the Fraser Institute compared the budgets and spending patterns of governments in Alberta and Texas between 2004 and 2014.
The Vancouver-based, freemarket-oriented think-tank concluded that Texas was prudent during that period of higher oil prices, while faster government spending growth in Alberta during the time frame contributed to the province’s current dire fiscal situation.
The collapse in oil prices beginning in the summer of 2014 has hurt Alberta’s government revenues, which are heavily dependent on energy royalties.
Alberta will borrow $7 billion for operating expenses this year — to keep the lights on at government facilities — and is on pace to run up more than $30 billion in debt by the end of 2019. The province held net assets of $30 billion at the end of 2009.
Despite the oil price rout, Fraser Institute director of prosperity studies Ben Eisen, who co-authored the report, said the study shows Alberta has a spending problem rather than just a revenue problem.
“The deficits and debt are a function of policy choices, they’re not an inevitable result of the fall in energy prices — although that certainly didn’t help,” Eisen said.
“The spending increases (in Alberta) were faster than the rate of inflation plus population, faster than the rate of economic growth and that’s what created the problem,” he said.
Since 2004, the report noted, successive Alberta governments have increased per-capita spending by 49 per cent and moved the province from a net asset to a net debt position. Texas, by comparison, increased per capita spending by 37.3 per cent but has maintained a steady level of debt and is not projected to dramatically increase its debtload as the oil price collapse drags on.
“Alberta and Texas are now on very different fiscal trajectories, as Texas’ financial position is comparatively strong while Alberta faces a potentially costly and economically damaging run-up in debt,” the study noted.
There are important differences between Alberta and Texas. The study noted oil and gas activity contributes 27.4 per cent of Alberta’s total gross domestic product compared to 12.3 per cent of Texas’s GDP — a sign that the state’s economy is more diversified than the province’s.
Alberta’s budgetary policies have previously drawn comparisons to oil-rich Alaska, Newfoundland and Norway, which were not covered in the study.
But Eisen said the difference between Alberta’s economy and Texas’s economy shows the province should be more prudent when spending money because energy booms and busts have more pronounced effects in Alberta.
“If you budget as though oil prices are never going to drop in a place like Alberta, then when they do drop you’re going to get a lot of fiscal pain,” he said.