[jawagord]

Or why I love the internet. Today, 5 years ago or 100 years ago, the story is basically the same for Alberta, insatiable demands and volatility!

Eric Hanson — Alberta’s first, and arguably greatest, economist — wrote a number of influential books on federal-provincial relations, education finance, health care finance, and energy economics. His doctoral thesis was entitled A Financial History of Alberta, 1905-1950 and was found by Paul Boothe at the University of Alberta library while Boothe was doing research on Alberta government spending almost forty-five years after it was written.
This “forgotten gem” sheds light on the institutional, economic, and public development of the province from a financial perspective and documents many of the early financial decisions of the Alberta government, including the railway scandal, the rise of Social Credit, and the province’s default in the Great Depression. With a detailed and analytical introduction, this edited work provides historical perspective on the perennial problems facing Alberta’s fiscal managers: wildly fluctuating revenues, in-migration, seemingly insatiable demands for infrastructure, high-quality public services, and resistance to taxes while exuding an optimistic attitude for the future.
http://www.ucalgary.ca/UofC/departments/UP/1-55238/1-55238-090-4.html

March 28, 2002
Why should Albertans care about revenue volatility? Last week's budget projected a fall in revenue of almost six per cent and a corresponding decline in program spending of over seven per cent. This follows a revenue decline in fiscal 2001-2002 of almost 18 per cent. In just about any other province in Canada, such volatility would be catastrophic. Unfortunately, Albertans have grown all too familiar with these rollercoaster revenues. With the most volatile revenues in Canada, Alberta has experienced changes of 15 per cent or more five times over the past twenty years.

The next most volatile province, Saskatchewan, has seen changes of this magnitude only twice.

Why are revenues such a problem? Economists have known since the late 1800s that changes in government revenue lead to changes in expenditure. The problem is that spending increases are a lot easier to accommodate than spending reductions. When revenues are fluctuating up and down, a bias in favour of deficits is built into government budgets.

However, volatility causes another equally serious problem. Extreme revenue volatility can reduce the quality of government services. For example, funding fluctuations make it very difficult to plan future health or education services and may lead to disruptions in current services. As the mayors of Edmonton and Calgary argued forcefully in recent weeks, the problems are even more pronounced when capital investment is involved, such as in building roads and bridges. Over the past 20 years, Alberta has had four annual increases in program spending of more than 10 per cent and six absolute reductions in program spending.
http://www.expressnews.ualberta.ca/article.cfm?id=2302

[Doug]

Easy solution: invest 100% of resource revenues in endowment funds, only spend the real rates of return on those funds (relatively stable), and force all of the fat public sector employees to live in the real world.

[240glt]

^The same real world as oil company employees live in ?

[Boris2k7]

And on a related note... some Obergness

Oberg targets $50B in savings
Heritage Fund now valued at $16.6 billion
Jason Fekete, and Chris Varcoe, Calgary Herald
Published: Saturday, July 21, 2007

http://img523.imageshack.us/img523/7351/e228marobergdcaj0.jpg
Lyle Oberg says the province wants to save more of Alberta's energy riches.
Photograph by : Calgary Herald Archive

http://img523.imageshack.us/img523/3774/17242656043aa7.jpg
Robert Roach, Canada West Foundation's director of research.
Leah Hennel, Calgary Herald

Finance Minister Lyle Oberg wants the province to pursue a more aggressive savings plan that will see the Alberta Heritage Savings Trust Fund -- currently valued at $16.6 billion -- nearly double in five years and reach $50 billion within a decade.

Oberg says the Stelmach government has a renewed commitment to saving the province's petroleum riches, and will seek guidance on how to invest the cash from a new financial management commission expected to be named within days.

"Five years from now, I'd like to see (the Heritage Fund) at probably $30 billion. I'd like to see a couple of billion dollars a year put into it," said Oberg, hoping Albertans will feel a growing attachment to the savings account.

"Ten years from now, I would like to see it potentially hitting the $40-billion to $50-billion range."

Economists, public policy groups and former premiers insist the province has missed a golden opportunity to save more petroleum wealth since eliminating the provincial debt in 2004.

The issue is all the more pertinent with resource dollars and surpluses projected to decline precipitously in the next few years.

Oil and gas revenues, for example, are expected to be cut nearly in half between 2005-06 and 2009-10 -- to about $7.8 billion from $14.3 billion.

The provincial government would have $18 billion to $19 billion more in its savings accounts had it started investing half of all energy revenues since retiring the debt in 2004, argued Robert Roach of the Canada West Foundation.

"We've missed the opportunity," said Roach, research director with the public policy think-tank. "All we do right now is take it in and spend it."

Achieving Oberg's targets will certainly require slowing the growth of government spending, which has soared more than 60 per cent in the past five years (when this year's budget projections are factored in).

It could prove difficult with tens of thousands of provincial employees seeking double-digit wage hikes, and increasing demand for new schools and more hospital beds. Just as painful are inflationary pressures that are driving up the price tags of capital projects.

Former premier Peter Lougheed, who created the Heritage Fund in the 1970s, said the Stelmach government should revisit original guidelines that saw 30 per cent of all resource revenues allocated into the savings account.

"The public, in my view, is sympathetic of a revitalization of the Heritage Fund," Lougheed said in an interview.

A Leger Marketing poll in June found that 46 per cent of Albertans believe the government is not squirrelling away enough resource cash into provincial reserves like the Heritage Fund, while 41 per cent said the government is saving enough.

The Calgary Chamber of Commerce, meanwhile, estimates the Heritage Fund would be worth $109 billion (including compound interest of five per cent) had successive governments followed the 30 per cent criteria and reinvested interest income in the account.

The group is urging the provincial government to step up its commitment to saving, by socking away between 30 per cent and 40 per cent of energy revenues into the Heritage Fund.

"Thirty to 40 per cent is a significant amount of cash that, if the government put that much money in, wouldn't hurt program spending," said chamber president Heather Douglas.

Liberal Leader Kevin Taft argues Progressive Conservative governments have frittered away Alberta's enormous energy riches from the recent boom years.

He's confident, though, there's still time to right the ship, and proposes boosting the Heritage Fund to $120 billion within 15 years to help secure Alberta's future.

"The greatest tragedy of the Tories in recent years is that they had no plan," Taft said.

"When you don't have a plan, it's just so easy to spend money and not save."

Saving has fallen by the wayside over the past two decades as successive Conservative governments used large chunks of resource revenues to fund programs and projects.

Paying down a provincial debt that totalled nearly $23 billion in the mid-1990s also sucked up billions of dollars that could have been stashed in the provincial piggy bank.

Oberg noted, however, there's more than $30 billion in provincial savings sprinkled across various investment vehicles, including the Heritage Fund, endowment funds and a sustainability account designed to cushion the government from volatile energy prices.

Although the debt is now history, Oberg said saving is easier said than done when the government must provide projects and programs to a province that saw its population swell by 100,000 in the last year.

"We've got to remember that what we're doing is providing necessary services in a white-hot economy," he said.

jfekete@theherald.canwest.com
cvarcoe@theherald.canwest.com

[Wooster]

Just imagine if both U of A and U of C had $10-15 billion endowments each. They could really compete with any university in the world.

Imagine a $1 billion arts endowment fund. A $1 billion sports and athletic endowment. $10 billion transit and community enhancement endowment. A $20 billion sustainable energy development fund, etc, etc.

It would be incredible. Unfortunately we don't have the leadership or foresight for any of these things.

[Doug]

^The same real world as oil company employees live in ?

Yes. The private sector is the master of its own destiny. When it gets too fat, it pays the price.

[freeweed]

^The same real world as oil company employees live in ?

Yup - let's see some government employees work under private sector employment standards. No unions. The actual possibility of being fired. Being promoted based on merit rather than seniority. Oh, and actually having to provide a competitive, valued service - not just getting paid because the law says it's so.

*sigh* we can dream. :rolleyes:

[Bassic Lab]

Yes. The private sector is the master of its own destiny. When it gets too fat, it pays the price.

The energy sector is not the master of its own destiny as it relies on purchasing resources from the public to exploit, the prices being set by the government, enabling the companies to turn a profit by under selling public property.

That is not a free market, it is a corporatist program to enrich certain people at the expense of the majority.

I hope neither you or Freeweed would have to deal with public servants that have had the "fat cut", the education of your children (teachers), your health (nurses), and your safety (Police, Fire, Military) is apparently not worth paying for in your books.

[Edmonchuck]

I hope neither you or Freeweed would have to deal with public servants that have had the "fat cut", the education of your children (teachers), your health (nurses), and your safety (Police, Fire, Military) is apparently not worth paying for in your books.


Something tells me that those folks weren't who Free and Doug referred to...;)

[The Geographer]

Something tells me that those folks weren't who Free and Doug referred to...;)

But they are the fat asses who are getting the money. Don't these teacher realize that the hokey pokey service they provide doesn't provide any value in the real world? Those lazy doctors and nurses treating all of the private sector oil workers who have overdosed on drugs that they can afford from getting paid $100,000 out of high school on the oil rigs... don't they know that they don't provide any real value? Not like Doug.

Let us see people. The economy is soaring, inflation is high, there is a chronic labour shortage, and some how the government is supposed to keep spending constant? The public sector has to compete with the private sector for employees in terms of wages, and people expect it to peg itself at 2000 funding? Nonsense.

[240glt]

Yup - let's see some government employees work under private sector employment standards. No unions. The actual possibility of being fired. Being promoted based on merit rather than seniority. Oh, and actually having to provide a competitive, valued service - not just getting paid because the law says it's so.


With current labor laws it is just as difficult to fire someone from a non-union position as it is to fire a union employee.

I find it odd that you'd think that government workers just sit around all day getting paid for doing nothing. I'll be the first to agree there's lots of inefficiencies within the government, but to say that all government emloyees are lazy & unproductive is ridiculous.

The private sector right now has the ability to pay much higher wages than the government for similar type positions. Therefore, we'd actually have to pay government employees more to get the same competitive, valued service.. assuming that valued service is tied to compensation.

[Doug]

The energy sector is not the master of its own destiny as it relies on purchasing resources from the public to exploit, the prices being set by the government, enabling the companies to turn a profit by under selling public property.

That is not a free market, it is a corporatist program to enrich certain people at the expense of the majority.

I hope neither you or Freeweed would have to deal with public servants that have had the "fat cut", the education of your children (teachers), your health (nurses), and your safety (Police, Fire, Military) is apparently not worth paying for in your books.


Not true. Exploration companies have to bid for permits. Those are awarded by auction, as free as free markets get.

[Lyle]

Just imagine if both U of A and U of C had $10-15 billion endowments each. They could really compete with any university in the world.

Imagine a $1 billion arts endowment fund. A $1 billion sports and athletic endowment. $10 billion transit and community enhancement endowment. A $20 billion sustainable energy development fund, etc, etc.

It would be incredible. Unfortunately we don't have the leadership or foresight for any of these things.

This is something that has always amazed me about Alberta. All that windfall wealth and so little of that wealth put away to transition the economy once the finite petroleum resources dwindle. The Heritage Fund is smaller in real dollars today (about $12 billion if I'm not mistaken) than it was 25 years ago.

But look at Norway, a country about the same size with a slightly larger population that is equally oil-dependent. Norway has been saving its oil wealth only since 1995 and has managed to put away over $200 billion US.

[Bassic Lab]

Not true. Exploration companies have to bid for permits. Those are awarded by auction, as free as free markets get.

Exploration rights are bidded for at auction, royalties are set at a constant rate across the board. In both instances (along with others, Alberta also has absurdly low stumpage rates for logging) the decisions are made while a questionable relationship exists between the business and government elites in this province.

Edmonchuck, this isn't the first time that public sector employees have been slagged here, last time it involved a desire for the nurses association to have been crushed in the early nineties. Evidently the occupations I mentioned are exactly the ones Doug thinks aren't valuable.

[SFUVancouver]

I'm amazed the Heritage Trust Fund is so low at only $16.6 billion. I had it, erroneously, in my head that it was already in the $60 to $70 billion range and heading north of $100 billion after these astonishing boom years. What happened? (Besides one of the biggest in-migrations of people in Canadian history and spiraling spending expectations). Plus why give it away as a one-off $400 cheque when that money could have done so much more for so many people if it was pooled? A $400 cheque must have been nice but I'd rather have better transit and a new library.

I'm glad this is becoming an issue because it would be heart wrenching to return to business-as-usual after the boom with little to show for it in the savings account. I've been saying for years that governments should put their income into an endowment and only spend the interest. I'm not an economist so I haven't a clue about the monetary ramifications of such a policy if it were to achieve wide-spread adoption. Never the less, it sure is worth a try when the money is flowing in like it is.

[jawagord]

This is something that has always amazed me about Alberta. All that windfall wealth and so little of that wealth put away to transition the economy once the finite petroleum resources dwindle. The Heritage Fund is smaller in real dollars today (about $12 billion if I'm not mistaken) than it was 25 years ago.

But look at Norway, a country about the same size with a slightly larger population that is equally oil-dependent. Norway has been saving its oil wealth only since 1995 and has managed to put away over $200 billion US.

The main reasons?

1. Norways oil production peaked in 2001 at 3.0 million barrels a day, Alberta's oil production peaked in 1973 and by 2001 Alberta produced less than 0.5 million barrels per day of light sweet crude plus another 0.6 million of lower priced heavy crude, so Norway has had about a 5 to 1 revenue advantage on oil.

2. Norway is a country and keeps all of its tax revenue. Alberta is a province, and Ottawa has been taking a net $4-12 billion a year from Alberta for the past 10 years.

3. Alberta has paid off $23 billion in debt since 1996.

[Lyle]

^ How much is Alberta saving from oil sands development? I think taxpayers are actually subsidizing oil sands exploitation, aren't they?

[Doug]

Exploration rights are bidded for at auction, royalties are set at a constant rate across the board. In both instances (along with others, Alberta also has absurdly low stumpage rates for logging) the decisions are made while a questionable relationship exists between the business and government elites in this province.

Edmonchuck, this isn't the first time that public sector employees have been slagged here, last time it involved a desire for the nurses association to have been crushed in the early nineties. Evidently the occupations I mentioned are exactly the ones Doug thinks aren't valuable.

If royalties were higher, the bids for exploration permits would be lower. If roylaties were lower, the bids would be higher.

[Doug]

^ How much is Alberta saving from oil sands development? I think taxpayers are actually subsidizing oil sands exploitation, aren't they?

No. Taxpayers do not contribute towards any of the capital or operational costs of the oil sands.

[Lyle]

No. Taxpayers do not contribute towards any of the capital or operational costs of the oil sands.

Eric Reguly on the Accelerated Capital Cost Allowance and Big Oil, from the Globe Dec. 12:

… For the opposition parties, the beauty of the oil sands is that you can point to them. The visuals are appropriately disturbing. You can see the gaping holes in the earth, you can measure the water flows, or lack thereof, as the projects drain the Athabasca River. You can measure the soaring carbon dioxide output and the consumption of natural gas, the clean fossil fuel that is being used to produce a dirty fossil fuel. You can ask the question: All this to keep American SUVs on the road?The NDP, emboldened by the oil sands “traffic jam” warnings of former Alberta premier Peter Lougheed, would love to see development slowed, even stopped, until a green-tinged energy program is put in place. They want to end the tax breaks to oil sands projects. Stéphane Dion, the new Liberal Leader, has said the tax breaks should go only to projects that significantly reduce their carbon dioxide output and water consumption. The Pembina Institute estimates the industry reaps $1.4-billion or more in federal tax goodies every year. You might think oil prices above $60 (U.S.) a barrel would be enough incentive to dig the goo out of the ground, but the oil industry thinks otherwise.

Stephen Harper’s Tories apparently have no plan to rein in their beloved oil sands players (to their credit, they have yet to satisfy Imperial Oil’s yearnings for freebies to build the Mackenzie gas pipeline). The oil industry itself knows the Tories are vulnerable on the oil sands front. Its lobby group, the Canadian Association of Petroleum Producers (CAPP), is already on the offensive. But even it underestimates the resolve of the NDP and the Liberals to force the oil sands to clean up its act. The nine provinces that didn’t have the dumb luck to sit atop a sea of tar know what’s good for Alberta is not necessarily good for the rest of Canada.

… The main development incentive is the ACCA — the accelerated capital cost allowance — which, since 1996, has applied to both surface and underground mining in the oil sands. It allows the individual oil sands projects, though not the parent company itself, to write off all of their capital costs before they start to pay income tax. If the project’s revenue is $1-billion (Canadian) and the capital expenditures are the same amount, the ACCA deduction can be $1-billion.

CAPP argues that the ACCA is a tax deferral, not a subsidy. That may be true, but it is nonetheless generous. Conventional oil and gas projects qualify for a 25-per-cent ACCA. It also argues the accelerated allowance is available to renewable-energy investments, so why not the oil sands? The answer is that it’s in Canada’s best environmental interests to speed up the development of green energy. Speeding up development of the oil sands is not.

There is a solution to this potential standoff between the oil industry and the federal and Alberta governments, on one side, and the opposition’s green warriors on the other, and that’s an ambitious energy policy that rewards clean, or cleaner, projects, and punishes dirty ones.

The ACCA should die. The oil sands need no artificial incentives to expand. The oil sands are vast and unique. Oil prices are high and there’s a guaranteed market in the form of the United States. If the ACCA did not exist, the projects would still have been built. Any savings from eliminating the tax deduction could help fund research to find ways to reduce the oil sands’ voracious gas and water needs and carbon dioxide output.

Alberta could do its part by raising the province’s absurdly low royalty rates (1 per cent on new projects) and devoting some of the extra income to renewable energy R&D funds, oil sands technology development, home insulation programs and the like.

[Doug]

The ACCA is a a tax deferral similar to the one enjoyed by the manufacturing industry. It was also eliminated for new oilsands proposals in the last federal budget. The article is also misleading as the 1% royalty rates only applies until capital costs are recovered at which point the rate rises to 25%. Again, another tax deferral, not subsidy.

Nice try though.

[The Geographer]

So are all of these projected falls in revenues a temporary lull between the time conventional oil slows down and the tar sands recover their capital costs? How long until the major projects recover their capital costs?

[Doug]

^It's mostly due to falling natural gas prices and production. Oil has never been as big a royalty contributor as gas. Coal bed methane production pay replace or even surpass natural gas production, but at much lower royalty rates as the production costs are higher.

I read somewhere that oil sands royaties should increase to ~$4.5B per year by around 2011-2012. Currently royalties from conventional and oil sands are ~$1B per year. Of course it won't matter, as the Alberta government will blow it instead of saving.

And before someone makes some comment about oil sands production consuming too much natural gas, royalties are paid regardless or where or for what reason the gas is consumed.

[Champion3]

Alberta is a province, and Ottawa has been taking a net $4-12 billion a year from Alberta for the past 10 years.
If you are referring to equalization, you would be wrong; resource royalties do not go to Ottawa.

[Mr Man]

^ not yet, anyway. You know how people get greedy and jealous.

[e909]

If you are referring to equalization, you would be wrong; resource royalties do not go to Ottawa.
He means a net of what goes in and what comes out.