Stakeholders, economists react to Alberta’s fiscal focus on Heritage Fund

Click to play video: 'Stakeholders await next week’s budget after address from Alberta premier'
Stakeholders await next week’s budget after address from Alberta premier
WATCH: There's a feeling of unease among a number of groups hoping for funding increases in Alberta's next budget. As Adam MacVicar reports, the premier is signaling restraint on spending. – Feb 22, 2024

Premier Danielle Smith’s Wednesday evening address announcing a plan to begin reinvesting in the Heritage Savings Trust Fund and keeping provincial spending below the inflation and population growth was met with mixed reviews the week before the new annual budget.

“The message of fiscal prudence was probably well received. The problem is that it’s going to come at the expense of promised (personal income) tax cuts,” Mount Royal University political scientist Lori Williams said.

Smith and the UCP made cutting the lowest personal income tax rate to eight per cent for the first $60,000 of income a prominent plank in their spring election platform.

“I think a lot of people are having a bit of buyer’s remorse or maybe even feeling a sense of betrayal,” Williams said.

In an interview with Global News on Thursday, Smith was asked about what she would say to Albertans who may have been counting on the nearly $1500 per family to help during inflationary times.

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“I think people know during an election campaign that you put forward a number of promises and you intend to achieve them before the next election,” the premier said. “So we wanted to make sure that our number one promise was kept, which is that we don’t go into deficit budgeting.”

Building the Heritage Fund

In her televised address, Smith said the goal of building the Heritage Fund to $400 billion by 2050 and creating a self-sustaining source of government revenue was to get the province off the so-called resource revenue rollercoaster.

For decades, Alberta has tied budget spending to the mercurial ups and downs of oil and gas prices, leading to years of eye-popping multibillion-dollar surpluses set against equally alarming deficits.

Alberta’s most recent forecast for this budget year, which ends in March, forecasts a $5.5-billion surplus against almost $69 billion in spending. It is tied to West Texas Intermediate — the North American benchmark price for oil — averaging US$79 a barrel.

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Created in 1976, the Heritage Fund was created as a savings for the future, to help strengthen or diversify the economy, and to improve quality of life. Thirty per cent of resource revenue was placed in the Fund in its first year, and in its first decade, $12 billion of resource revenues were added.

Capital projects were paid for from the fund almost immediately, and starting in 1982, part or all of the fund’s net returns were withdrawn to be added to the province’s budget.

Click to play video: 'Alberta looks to rely on Heritage Savings Trust Fund going forward'
Alberta looks to rely on Heritage Savings Trust Fund going forward

“(Successive) governments have not made any concerted effort to save,” University of Calgary economics professor Ron Kneebone said. “Every once in a while they’ll say, ‘We’ll kick in a few hundred million into the Heritage Fund. We’ll inflation protect it.’”

Smith’s proposal of a 26-year experiment in delayed gratification presents some challenges.

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“How does she commit this government and future governments to not spend that money? How do you get them to commit to saving all this royalty? That’s the tricky part,” Kneebone said.

Balancing Alberta’s budget has always been a tricky challenge.

“We cannot balance the budget without resource royalties,” U of C economics associate professor Lindsay Tedds said. “We still are not committing to getting tax revenues from someplace else. There’s still not a sustainable, public finance framework here.”

And that could present challenges for Smith’s plan to grow the Heritage Fund by nearly 20 times its current size.

“Albertans don’t like paying taxes, but they do like high quality services, and resource royalties has been the way for them to have both ways,” Tedds said. “But you can’t put them aside for the future without having more diverse revenues come in. And at that magnitude, we are talking about a new tax.

“Nothing will replace resource royalties except another tax. The plan that was announced last night, the plan that we will see next week, is not sustainable.”

Click to play video: 'Smith says restraint needed in Alberta budget 2024, vows to build Heritage Fund'
Smith says restraint needed in Alberta budget 2024, vows to build Heritage Fund

The road to $400 billion

Tedds said growing the Heritage Fund to between $250 and $400 billion would require annual deposits of $14 to $15 billion, which she says is best achieved with more tax revenues, given the volatile nature of oil prices.

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Kneebone said it’s possible to get the Heritage Fund to the $400 billion mark, “but it would take high oil prices for a long time and (government) maintains the commitment to not spend.”

Chetan Dave, an economics professor at the University of Alberta, said if spending growth is kept below population growth and inflation, hitting that fund goal is “perfectly feasible” if another element is added.

“The second element that you would need is governance,” Dave said. “Whether it be independent from the government or not, whether it be professionally managed by a bunch of economists, etc., just like they did in Norway.”

But that’s not without some “tough decisions,” he said.

“I have a sneaking suspicion that the needs of cities are going to take a backseat. But for example, wildfire season is not going to take a back seat,” the U of A economist said.

At an unrelated press conference, Alberta Municipalities president and Wetaskawin Mayor Tyler Gandam said there’s a large need for investment in infrastructure in the province.

“We’ve got a $30 billion infrastructure deficit across the province. We’ve got a number of municipalities that are growing overwhelmingly, and those shortcomings are what’s going to hold us back in terms of that growth that we’re going to see in the province,” Gandam said.

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He also said municipalities would like to see more justice and social supports.

Schools across the province are in need of investment, too.

“There’s a dire need for more schools in Edmonton and, of course, we have our fingers crossed that budget 2024 is going to fulfil the commitment to build as many schools as possible,” Sandra Palazzo, Edmonton Catholic Schools board chair, said.

“Our priority is always to ensure an optimal learning environment for our students. It’s becoming extremely difficult with nearly 40 per cent of our school buildings being full or over capacity.

“The only answer to overflowing schools is to build new schools.”

Click to play video: 'Alberta Health Services requiring executive approval on new positions'
Alberta Health Services requiring executive approval on new positions

And Alberta’s in direct competition with other provinces in trying to attract health-care workers to come to this province to help with a multi-year crisis in health care.

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“We hope to see no cuts. We hope to see a real plan to get the infrastructure we need built like the Red Deer Hospital, like the South Edmonton hospital that’s been talked about,” Chris Galloway of Friends of Medicine said.

“And we would like to see a commitment to workforce planning – it’s something that government could easily do.”

Smith said there will be no cuts in the budget that will be tabled in the Legislature on Feb. 29.

“We want people to know that we’re prioritizing making sure that those key services are going to be there for people,” the premier said Thursday. “But having a slower rate of increase is going to ensure that we’re able to have it all: we’re able to pay down debt, we’re able to put money aside for the future, we’re able to deliver on long term tax cuts, and we’re able to take care of those who most need it.”

With the previously-unannounced change in budget direction, Williams is taking a wait-and-see approach for the province’s budget.

“I think there will still be a lot of unanswered questions after the budget,” Williams said.

— with files from The Canadian Press

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