Opinion: Building a $300-billion Heritage Fund worth pursuing

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Premier Danielle Smith, in her televised address last week, promised a focus on long-term sustainability in Alberta fiscal planning, including building a $250-billion to $400-billion Alberta Heritage Savings Trust Fund by 2050 and paying down a large part of maturing debt.

The premier should be lauded for these plans, but getting there will be a challenge. With Budget 2024 fast approaching, Albertans deserve a better idea of the extent of the challenge of building a $300-billion fund, and why we must meet it.

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Using a long-term model of the economy, a business-as-usual long-term fiscal outlook for the Alberta government takes a more cautious approach to forecasting revenue growth than the government, using a WTI oil price of US$70 per barrel, in response to an accelerating energy transition. Overall, Alberta revenue growth averages about three per cent per year. On the expenditure side, operating increases are projected at the combined rate of inflation and population, or about 3.8 per cent per year. The long-term fiscal outlook will be updated once Budget 2024 is released later this week.

Based on this more prudent fiscal outlook, Alberta’s projected surplus is a narrow $818 million in 2024-25, slipping back to a projected $615 million deficit in 2025-26, with projected deficits then climbing to more than $10.2 billion by 2049-50. With Alberta’s new fiscal framework legislating that all net investment income earned by the Heritage Savings Trust Fund remain in it, the value increases from $19 billion as of March 31, 2023, to $96.3 billion by March 31, 2050 — still $203.7 billion short of the target.

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So, what does the government need to do? Given the lack of political will to diversify its revenue streams, it will need to make significant adjustments to its operating spending, a fact Smith alluded to during her address.

When the $300-billion fund policy scenario is simulated, it shows the government will need to limit average operating spending increases to just two per cent per year, rather than 3.8-per-cent average spending increases under the reference case. In the next three fiscal years alone, the absolute size of the downward adjustments to operating spending is estimated at $1.4 billion in 2024-25, $3 billion in 2025-26, and $4 billion in 2026-27. And, by 2029-30, the projected fiscal adjustment from operating spending will grow to nearly $8.3 billion.

With operating spending under the $300-billion fund policy scenario increasing by just two per cent per year, the growth of spending in such areas as health care, K-12 education, post-secondary education and social services, which make up the bulk of Alberta’s operating spending, will need to be significantly constrained. While doable, this will be difficult given demographic factors and Alberta’s track record of overspending following large increases in oil and gas revenues.

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However, suppose current and future governments remain committed to the fiscal vision. In that case, future generations will see the benefits, and the province’s fiscal future will finally be secured. Alberta’s projected surpluses will grow from nearly $1.7 billion in 2024-25 to $7.3 billion in 2029-30, reaching more than $42 billion in 2049-50. Using these projected year-end surpluses more judiciously, the province’s net financial debt could be eliminated by 2031-32; the taxpayer-supported debt could be eliminated by 2038-39; and a $300-billion Heritage Fund could be built by 2049-50, generating about $15 billion in annual earnings that fiscal year.

What is required is a change of thinking by Albertans and their government about how budget surpluses, largely generated from windfall oil and gas revenues, are used for fiscal planning. As shown here, in the absence of efforts toward revenue diversification, tempering expectations about spending increases in such areas as health care, education and social services will be critical to achieve the Alberta Heritage Savings Trust Fund goal.

Lennie Kaplan is a former senior manager in the fiscal and economic policy division of Alberta’s Ministry of Treasury Board and Finance. In 2019, Kaplan served as executive director to the MacKinnon Report on Alberta’s Finances. He recently retired from his position as executive director of research at the Canadian Energy Centre.

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