Is Alberta’s economy really too dependent on fossil fuels?

Two events this month focused attention on the long-term future of Alberta’s troubled, energy-dependent economy; last week’s provincial budget and the federal NDP’s decision to consider the contentious Leap Manifesto.

The New Democrats voted at their convention in Edmonton to debate the Leap document, a call to action on climate change whose central plank is a demand to end investment in fossil-fuel projects, including a halt to new pipeline construction to bring existing oil sands production to market.

Instead, money would be put into development of sustainable and renewable energy projects and retraining oil and gas workers.

The manifesto was quickly rejected by Alberta Premier Rachel Notley. Her NDP government’s first budget since taking office last year nonetheless calls for spending more on renewable energy development.

If Notley and the manifesto’s authors have anything in common it’s the view that the world is trying to move away from fossil fuels, which in the long term could make Alberta’s oil and gas sector a sunset industry. It’s the timetable that’s in dispute.

In Alberta there’s always been an understanding that it should not expect to depend on oil and gas revenues indefinitely. Starting with then-premier Peter Lougheed in 1973, the Progressive Conservatives, who governed the province for more than four decades, intervened heavily to try to develop alternative industries.

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You’re not hearing anything about that today in part because much of the effort was embarrassingly wrong-headed. An article last year for the University of Calgary’s School of Public Policy co-authored by former PC finance minister Ted Morton details the strategy’s many failures.

The government put money into a variety of underperforming ventures, from a cellphone manufacturing plant to a hazardous-waste treatment facility, a northern B.C. grain-handling terminal, a startup pharmaceutical producer, a laser technology developer and even a bank. All either went bankrupt – spectacularly in the case of Canadian Commercial Bank – or the government sold its stake at a loss, Morton pointed out.

There were success stories, he wrote, but most related to Alberta’s traditional resource-extraction sectors; the pioneering Syncrude oil sands development, Luscar Ltd. coal mines, ethane-based petrochemical production. The province also successfully launched the Bank of Alberta, now Canadian Western Bank, and profited from its stake in Pacific Western Airlines.

Diversification strategy seen as major failure

But on balance, Morton and co-author Meredith McDonald argue, the strategy was a major failure.

“Between 1973 and 1993 [when Ralph Klein became premier], the Lougheed-[Don]Getty ‘forced-growth’ economic diversification projects are conservatively estimated to have cost Albertans $2.2 billion,” they write.

Much of the money came from the Alberta Heritage Savings Trust Fund, originally intended by Lougheed as a place to bank some of the province’s growing energy royalties for a rainy day. Many, including Morton, say it evolved into a political slush fund to finance often half-baked ventures.

There’s no evidence the NDP, who philosophically should not be averse to intervention, is interested in reviving the Lougheed-era strategy. The incentives offered in last week’s budget for things such as diversifying Alberta’s petrochemical sector are fairly small, says Trevor Tombe, a University of Calgary economist.

“They’re not going big down the road of subsidizing pet projects like Peter Lougheed and Don Getty did, and thankfully so,” he said in an interview with Yahoo Canada Finance.

Tombe argued that the decades-long obsession with “forced-growth” diversification stems partly from having framed the problem incorrectly.

ALSO READ: Alberta budget shows province must cut oil dependency

The question is not how do you diversify away from the economy’s reliance on the fossil-fuel sector, but how do you diversify the government’s sources of revenue? The reason people have avoided that question is because one unavoidable answer is political dynamite – a provincial sales tax.

Tombe noted direct and indirect employment in oil and gas and related activities account for only 14 per cent of jobs in Alberta.

“When you do that systematically across all the sectors and compare it to other provinces, our employment is no less diverse than Ontario,” he said.

“But by what metric do we decide whether or not an economy is over-reliant on this sector or that sector? Is Ontario over-reliant on finance and manufacturing? That’s not a conversation we often hear.”

When it comes to economic volatility, Alberta is little different from other provinces, said Tombe.

But the Alberta government is heavily dependent on resource royalties and taxes to fund public services. When those revenues sink, the only alternatives are deficit financing, which Getty used, or Klein’s program of drastic cuts.

A 2013 paper also published by the School of Public Policy noted 21.64 per cent of the Alberta government’s revenues in the previous two fiscal years came from non-renewable resources. That creates income volatility for the government that the Heritage Fund was initially set up to address but rarely did.

“We have a very strong economy even today,” Tombe contended. “The problem is the government’s budget and that’s completely separate from the economy.”

Save oil and gas revenues for hedge against decline, says economist

The government needs to be more disciplined about socking away oil and gas royalties, as Norway has done with its trust fund, which is not used for domestic economic development but invested prudently offshore. It’s now worth close to a trillion dollars.

Those savings provide a hedge for the day the world weans itself off fossil fuels, Tombe explained.

“If oil and gas is on the way out in the longer term then that asset will not be all that valuable in a generation or two from now,” he said. “But if we convert it into a financial asset through saving, those financial assets will still have value in the future.”

Tombe also pointed to the 2013 paper that recommended Alberta finally create a harmonized federal-provincial sales tax comparable to its western neighbours, suggesting an eight per cent provincial component on top of the five per cent federal GST.

An Alberta HST wouldn’t necessarily bring in more money because it could be offset by corporate and income tax reductions to help maintain the province’s economic competitiveness, the authors suggested. But it would be a more stable revenue source than personal and business income taxes, the authors argued.

“By reducing reliance on personal and corporate income taxes, and introducing consumption taxes, the province can shift its tax mix toward less volatile, more efficient sources of revenue,” the paper concluded.

ALSO READ: Alberta should not use savings fund to balance books: premier

But even though Albertans have been paying GST for 25 years, the absence of a provincial tax is a sacred cow. All parties know introducing one is flirting with political suicide.

Notley and Finance Minister Minister Joe Ceci ruled it out this week but it’s a measure of the government’s financial straits that they won’t commit to that beyond 2019.

With little sign energy prices will rebound to former heights, Tombe said the government will be pulled between finding new revenue sources or making painful spending reductions.

“So it is a difficult choice even though the accounting and the economics are very simple,” he said.