HILL: Here’s how Smith government can help end boom-and-bust cycle in Alberta

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The Smith government will table its budget for the 2026/27 fiscal year on Feb. 26. Following last year’s large budget deficit, Premier Smith recently warned “significant” deficits are on the way amid low oil prices. It’s time the Smith government try a new approach and introduce a rainy-day account to help mitigate Alberta’s boom-and-bust cycle.

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It’s a familiar story. For decades, when resource prices (e.g. oil) have been relatively high, the Alberta government tends to enjoy surpluses. But when resource prices fall, those surpluses turn to deficits. Indeed, for years we’ve warned that without a change in course, Alberta would spin into deficits when oil prices inevitably fall.

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Time for a new approach

Consider that just a few years ago, in 2022/23, oil prices averaged nearly US$90 per barrel and the government posted an $11.5-billion surplus. Today, oil prices are averaging roughly $60 per barrel and the Smith government will post a projected $6.5-billion deficit for fiscal year 2025/26.

Unless the government tries a new approach, Albertans should prepare for another “bust” period of debt accumulation. The last time this happened, Alberta went from effectively a debt-free province, with Albertans paying negligible debt interest on the government’s debt in the mid-2000s, to paying more than $2.2 billion in debt interest by 2019/20 (even before the pandemic) — that’s more than $500 per Albertan. And the more money the government (i.e. taxpayers) pays in debt interest, the less money available for services such as health care and education, or to make fiscal room for tax relief.

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That’s the problem with relying on volatile and unpredictable resource revenue to support the budget. Premier Smith recognizes “our province has become unsustainably dependent on non-renewable resource revenues.” So it’s not that governments don’t understand the problem — but they still have yet to meaningfully address it.

Fortunately, there are potential solutions. Consider the Alberta Sustainability Fund, originally introduced in 2003. Here’s how it was intended to work. The provincial government would determine a relatively stable predictable amount of resource revenue to include in the budget, and automatically deposit any excess resource revenue above that amount in the rainy-day account. In years when resource revenue falls below that set amount, the government could withdraw the difference from the rainy-day account to support the budget.

Rainy-day account

This is separate and distinct from the Heritage Fund, which is meant for long-term savings of resource revenue. The rainy-day account is specifically designed to manage short-term volatility.

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Unfortunately, the Alberta Sustainability Fund quickly fell apart. By 2007, the government was using nearly all resource revenue for annual spending and the fund was eventually drained and eliminated entirely in 2013. But the fundamental idea — to save during the good times to help manage the bad times — is what Alberta is missing today.

In the upcoming budget, the Smith government should finally break from the status quo, which will only lead to more deficits and debt on the back of Albertans. Instead, Premier Smith should re-establish the Alberta Sustainability Fund, which would provide a stable predictable level of resource revenue for the budget to help end the boom-and-bust cycle that’s plagued Alberta for decades.

Tegan Hill is director of Alberta policy at the Fraser Institute.

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