Lauerman: Time For The Next-Gen Alberta Advantage

Economic prosperity is a privilege, not a right.

Prior to the two oil price shocks of the 1970s, Alberta was a have-not province. We have been fortunate to prosper ever since. That prosperity is a function of many things, all with a common foundation: Alberta’s people. But as is evident in the daily headlines, energy and agriculture, our province’s two key sectors, are now facing severe challenges, putting the province’s prosperity at risk.

Premier Kenney has continued to tie Alberta’s economic future to the low-tax Alberta Advantage, moving forward the province’s corporate tax cut from 12 to eight per cent as part of Alberta’s Recovery Plan released early last summer in response to COVID-related economic carnage.

But the Alberta Advantage has failed to diversify the province’s economy from its heavy reliance on the oil and gas industry in the past — stealing some head offices from other Canadian jurisdictions, but not much more — while contributing to ever bigger budget deficits over the past decade and a half.

In September, Bill Whitelaw, president and CEO of JWN Energy, was kind enough to involve me in his company’s Energy-Ag Industry Summit: Growing Forward Together. The white paper from the summit was released last week, promoting a Next-Gen Alberta Advantage to heal what ails the province’s economy instead.

Alberta Advantage?

The Alberta Advantage, combining low taxes with quality social services and the province’s often-envied and well-known free enterprise spirit, has been Alberta’s unofficial mantra since the phrase was uttered during former Premier Ralph Klein’s first throne speech in August 1993.

What many Albertans failed to realize, then, as now, was our provincial tax advantage, including high exemptions for personal income tax, low personal and corporate tax rates, and no sales tax, was being financed by high oil and/or natural gas royalty revenue for most of this period. A conscious political decision was made to subsidize the amount of tax Albertans presently pay with royalty revenue, rather than saving for a rainy day or for future generations.

After Premier Klein pushed the province’s gross debt down to zero in the first half of the 2000s, subsequent Progressive Conservative Party governments generally ran relatively small budget deficits through to 2015-16, at which point prices for western Canadian oil prices fell through the floor and budget deficits ballooned. Natural gas prices and royalty revenue peaked in 2005-06, and have fallen drastically since. And as is becoming increasingly apparent to everyone, those halcyon days are unlikely to ever return (see Time For Alberta To Build A Cleaner Economy).

In August, the Kenney government forecast a mammoth $24.2 billion deficit for fiscal year 2020-21, partly due to COVID-related economic carnage, or 8.1 per cent of the province’s GDP. This represents the largest deficit in percentage terms of any province over the past 35 years.

Projected revenue from non-renewable resources for 2020-21 was estimated at a mere $1.2 billion, the lowest amount since 1974-75, not even adjusting for inflation. Resource royalties were expected to account for only three per cent of Alberta’s total revenue this fiscal year, compared to a record high of 77 per cent in 1979-80, and 27 per cent as recently as 2011-12.

As a result, Alberta’s gross debt would have hit roughly $100 billion by spring 2021, the end of the fiscal year, and net debt would be around $67 billion, or 22.3 per cent of GDP. This would still compare favourably with British Columbia and Saskatchewan, at 22 per cent and 20.8 per cent, respectively, but Alberta’s debt trajectory has been far more severe in recent years than those provinces.

Next-Gen Advantage

Fortunately, there’s a way out of our present predicament: the Next-Gen Alberta Advantage.

By viewing the challenges as opportunities, rather than fruitlessly fighting them, we can put our economy onto an environmentally sustainable path and support development of new cleaner industries for our energy and agriculture sectors, serving both domestic and international markets.

As David Collyer, a board member of both Emissions Reduction Alberta and the Canadian Institute for Climate Choices — and former president and CEO of the Canadian Association of Petroleum Producers — said during the summit, the core industries within these two sectors should continue to grow, assuming they meet their environmental challenges, creating business opportunities on the environmental mitigation front.

Alberta’s agricultural and energy sectors could also pivot towards new industries within their own sectors to further mitigate environmental impacts — such as blue hydrogen, geothermal energy and so-called plant-based alternatives — or could involve both sectors — for example, renewable natural gas.

This is assuming, of course, that we can significantly bolster technological and other innovation in the province, as international competition will be fierce in those new industries. We Albertans like to think of ourselves as an innovative people, but in the Conference Board of Canada’s last innovation report card for 16 advanced countries — including Canada — and the 10 provinces, in May 2018, our province received only a ‘D’. The Conference Board scored Alberta at the top of the provinces for being self-starting entrepreneurs, but gave us failing grades for both public and private R&D investment and venture capital investment.

The lack of public and private spending on R&D in Alberta seems especially shocking since the oilsands industry has been under siege by the global environmental lobby for well over a decade, and until five years ago the province and our oil and gas industry were making money hand over fist. A more rapid rate of technological innovation to decrease the industry’s carbon footprint and other environmental negatives may have put the ‘dirty oil’ lobby on its back foot.

Grand Bargain

As a result, it’s imperative the Alberta government gets its financial house in order to allow it to invest heavily in new technologies and innovations to clean up our present energy and agricultural sectors and to support development of new industries within each. Unfortunately, the Kenney government, with its old Alberta Advantage mindset, lacks a coherent plan to achieve fiscal discipline in the province.

Prior to tabling Alberta’s latest fiscal update in Edmonton on Nov. 24 — when the province’s projected deficit for this fiscal year was cut by almost $3 billion, roughly half due to pandemic relief from the Feds — Finance Minister Travis Toews negated the possibility of the province adopting a sales tax, while suggesting the public sector, including health care workers and teachers, will bear the brunt of any deficit reduction measures.

However, according to Trevor Tombe and Ted Kouri — an economics professor at the University of Calgary and president of Edmonton-based Incite Strategy, respectively — Alberta’s structural deficit assuming plausible oil and gas prices in the future is approximately $10 billion a year. Spending cuts of that magnitude are simply not plausible, and even at half that level would likely lead to severe labour strife in the province, especially given already strained relations between the Kenney government and unions representing public sector workers, including health care workers and teachers.

Readers of a certain vintage will remember the negative impact severe labour strife had on investor confidence and economic growth in many European and Latin American countries in the 1970s — much like half measures to fight the COVID-19 pandemic. If the Kenney government is to get the province’s fiscal house in order and avoid this outcome, it will need to negotiate a grand bargain with the unions, sharing the economic pain between provincial workers and taxpayers.

At the same time, the next-gen advantage should be based on industrial policy-like long-term strategic planning, not the laissez-faire planning system that failed to successfully diversify our economy in the past. Think Japan post-World War Two and China since the end of the 1970s. And if you don’t think Alberta could implement such a systematic and thoughtful industrial policy, remember former Premier Peter Lougheed implemented the in situ research program in the mid-1970s, which finally allowed for the economic development of oilsands deep in the earth as of late last century.

To conclude, the Next-Gen Alberta Advantage, if properly framed and robustly pursued, has the potential of ensuring the province remains economically prosperous far into the future. In addition, it provides powerful ammunition to counter critics of Alberta’s current oil and gas industry and agriculture sector, while at the same time making Albertans appear a progressive people. This should help attract the next generation of workers and investment to the province, as current workforces have become extremely aged, while attracting talented young researchers and venture capitalists to the province to further support innovation and economic growth.

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