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Fiscal Situation of Canada’s ‘Oil Rich’ Provinces

Posted June 19th, 2017

By Nick Falvo, PhD

Nick Falvo is Director of Research and Data at Calgary Homeless Foundation.


To end homelessness, provincial and territorial governments need to adequately finance social spending—especially spending on affordable housing, social assistance, child benefits, and homelessness services. With this in mind, I organized and chaired a panel discussion at this year’s Annual Conference of the Canadian Economics Association; the panel’s focus was the fiscal situations of Canada’s so-called ‘oil rich provinces,’ namely Alberta, Saskatchewan, and Newfoundland and Labrador.

The following individuals spoke on the panel: Garry Sran (Slides PDF), Robin Shaban (Slides PDF), Nathan Jackson and Jason Childs (Slides PDF).

Here are 10 things to know:

  1. The fiscal health of Canada’s ‘oil rich’ provinces is heavily dependent on the price of oil. For example, for Alberta’s provincial government, every $1 increase in the price of oil translates into $310M in additional annual revenue.[1] There are four reasons for this. First, the higher the price of oil, the more incentive there is for corporations to extract oil from the ground. Second, each of the three ‘oil rich’ provinces collects royalties as a result of oil extraction—and they collect more royalties when more oil is extracted. Third, corporations that are part of the oil extraction effort (either directly or indirectly) pay more corporate income taxes when they’re extracting large amounts of oil. And fourth, when more oil is being extracted, more workers are employed (either directly as part of the oil-extraction process, or indirectly in spinoff industries) meaning they pay more taxes and depend less on social welfare programs such as provincial social assistance.
  2. Beginning in 2014, the price of oil took a nosedive, and it has yet to recover. Prior to this decrease, the price had been hovering at around US$100/barrel for several years. But since late 2014, it’s generally remained less than US$50/barrel. This steep decrease stems largely from declining rates of economic growth in China and India. This trend is illustrated in the following line graph:
5_yr_crude_oil_2011-2015_1061

Source.  Sparrow, J. (2016, January 13). The falling price of oil and Calgary real estate [Blog post]. Retrieved from http://www.jimsparrow.com/blog/the-falling-price-of-oil-and-calgary-real-estate.html

  1. Going forward, it’s virtually impossible to predict the price of oil with any degree of accuracy. There are three main determinants of the price of oil: 1) supply (i.e. how much oil gets produced); 2) demand (including rates of economic growth in China and India); and 3) expectations (i.e. how much oil gets stockpiled by countries, geopolitical events, etc.). During the discussion section of the panel, Lars Osberg brought to light a 2012 report in which seven well-respected economists tried to predict the price of oil for 2016. They predicted that, by 2016, the price of oil would likely range (90% confidence interval) from US$100 to US$170 per barrel. Yet, during 2016, the actual price of oil ended up dipping to less than US$50 per barrel and was never higher than US$60 per barrel at any point during the year.
  1. In light of this uncertainty, it would be imprudent for Canada’s ‘oil rich’ provinces to assume that the price of oil will return to past levels. I think we should all take a page from the World Bank’s chief executive officer, Kristalina Georgieva, who recently stated: “We should accept that the prices will be more or less within the current range.” We shouldn’t rule out a major increase in the price of oil, but we shouldn’t bank on it either.
  1. Each of these provinces has difficult choices over the next several years. Keeping in mind that the price of oil may not rise much in the near future, each province has three main options: 1) less spending; 2) more taxation; or 3) more deficit-financing. If they opt for less spending, they run the risk of hurting vulnerable people. Saskatchewan’s decision to stop subsidizing its only intercity transportation service is one such example—this will likely have a disproportionate impact on First Nations and seniors. If a province opts for more taxation, there may be unintended consequences (e.g., behaviour responses to increases in personal income tax rates). And if they opt for more deficit-financing, they’ll have increased debt-servicing charges.
  1. Each government will have to decide how large a deficit to run each year. When provincial governments decide how large a deficit to run, political factors often play an even greater role than economic factors. In discussing Saskatchewan’s fiscal situation, for example, Jason Childs suggested that the timing of the current government’s deficit-reduction strategy coincides with the next provincial election.
  1. Each government will have to decide on how much new revenue it wants to bring in through taxation. In Alberta, there are some indications that momentum is building to increase tax revenue.[2] Results of public opinion polling earlier this year found broad support for some forms of tax increases, especially if such tax increases were to finance important public services (e.g., long-term care for seniors, income assistance for low-income households). More recently, a well-respected credit-rating agency suggested that the Alberta government seriously consider raising taxes (a point raised during Nathan Jackson’s presentation). Meanwhile, Garry Sran reminded us that Alberta still has no provincial sales tax. Newfoundland and Labrador has opted for increases in several taxes and fees. In its 2016 budget, it increased its Harmonized Sales Tax from 13% to 15%, brought in a temporary gas tax of 16.5 cents per litre, introduced a Temporary Deficit Reduction Levy and a variety of user fees.[3]
  1. Each government will also have to decide on the structure (and fairness) of its tax system. Alberta’s provincial government has moved away from a flat tax on personal income, but its provincial tax structure is still quite regressive relative to other Canadian provinces (meaning that it doesn’t make high-income earners pay as much as it could). Indeed, discussing recent tax changes in Alberta, Nathan Jackson noted that Alberta’s tax structure is still quite flat. What’s more, public opinion polling suggests that the majority of Albertans believe high-income earners and corporations still do not pay enough taxes. Saskatchewan is on a path that may be financially viable, but this may hurt low-income households harder than high-income households—that point was made by Jason Childs in his presentation (and I’ve previously made the same point about Saskatchewan here). Notwithstanding the temporary tax changes discussed in point #7 above, Newfoundland and Labrador hasn’t announced any major, permanent changes to its tax structure (but has recently announced it will strike a committee to review its tax system). It has also announced that individuals with annual incomes of less than $50,000 will not have to pay the aforementioned Temporary Deficit Reduction Levy.
  1. Some people outside of government have put forward alternative ways forward for their governments to increase revenue. During his presentation, Nathan Jackson suggested that the Alberta government shift to a more progressive personal income tax structure, implement a provincial sales tax, and introduce a tax rebate for low-income earners. He argued that while a sales tax would generate a significant amount of stable revenue for Alberta, low- and middle-income earners would pay a larger portion of their income towards the new tax than high income earners. By combining the new sales tax with a shift towards a more progressive income tax structure and a robust low-income rebate, the province could generate substantial new revenue while ensuring the increased tax burden does not disproportionately fall on low and middle income earners. And over on the east coast, Common Front (a coalition of labour, social justice and community groups), has recently proposed a way forward for the Newfoundland and Labrador government (their policy document, which includes recommendations on changes to their province’s tax system, can be found here).
  1. There are lessons to be learned from other jurisdictions. A recent US report looks at the fiscal situations of states relying on revenue from oil, natural gas, and other fossil fuels. It recommends that states that rely heavily on such revenue avoid tax relief for high-income earners and profitable firms in boom times. It also suggests that state governments diversify their revenue sources (including via personal and sales taxes).

 

In Sum.  Social spending is a key determinant of how many persons experience homelessness in a given year (something I’ve written about here). Just as decreased social spending was an important contributor to rising homelessness in Calgary beginning in the mid-1990s, increased social spending is key to ending homelessness. And any provincial government wanting to increase social spending needs a solid fiscal plan to get there.

The author wishes to thank the following individuals for invaluable assistance with this blog post: Vicki Ballance, Daniel Béland, Jason Childs, Keith Dunne, Nathan Jackson, Ali Jadidzadeh, Kara Layher, Lindsay Lenny, Janice MacKinnon, Mel McMillan, Kevin Milligan, Lars Osberg, Robin Shaban, Joel Sinclair, Garry Sran, Trevor Tombe and one anonymous source. Any errors lie with the author.


Download a PDF of this blog post here: Fiscal Situation of Canada’s ‘Oil Rich’ Provinces

[1] See p. 38 of this document.

[2] Readers should note that the Notley government has already increased some taxes. See point #3 of this previous blog post.

[3] For a brief overview of Newfoundland and Labrador’s 2016 budget, see this article.

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