As the Alberta New Democratic Party passes the half way mark of their first four-year term in office and the United Conservative Party chooses its next leader, a big question that remains unanswered in Alberta politics today is how, in the long-term, the Alberta government plans to deal with the revenue shortfall created by the drop in the international price of oil.
After decades of rich oil and gas royalties pouring into public coffers, the Alberta government became over-dependent on oil and natural gas royalties to pay for a large portion of the daily operations of government.
The old Progressive Conservative government led by Ralph Klein used those high royalty revenues to subsidize corporate and personal tax cuts, which proved politically popular in the short-term but fiscally irresponsible in the long-term. When the international price of oil dropped in 2014, so did about $10 billion worth of expected government revenue that the PCs were depending on.
After their election in 2015, Rachel Notley‘s NDP took steps to diversify government revenue with moderate increases to corporate and personal taxes. Even after those increases, Albertans still pay some of the lowest taxes in Canada and those increases were nowhere enough to fill the revenue shortfall.
The positive news is that Alberta’s economy is recovering, but unless the international price of oil recovers, the government will remain in a deficit situation for the foreseeable future.
While I support Notley’s smart choice to continue investing in public services and capital infrastructure projects during the course of the economic recession, it is not clear that the NDP have a real plan to deal with Alberta’s revenue challenges in the long-term.
It is an odd sight to read Finance Department documents that both lament a large budget deficit and boast about low taxes. The NDP inherited one big bad habit from the old PC government and have been unable to break from it.
But if you think the candidates for the leadership of the new United Conservative Party are coming up with new, bright ideas for Alberta’s long-term future, think again. Political rhetoric about returning to the mythical “Alberta Advantage” and calls for drastic cuts to both government spending and revenue are mostly what Jason Kenney, Brian Jean and Doug Schweitzer have proposed.
It is meat for the party base, but not exactly inspiring plans for Alberta’s future.
I get the impression that while they are playing from different sides of the political spectrum, both the NDP and the UCP’s prospective leaders are praying that oil prices recover enough to avoid having to raise taxes or slash the budget to shreds.
Alberta has a revenue problem. And the sooner someone is willing to “take the tax bull by the horns,” as my colleague David Climenhaga wrote, and begin planning for a more sustainable government revenue stream, the better off future generations of Albertans will be.
Schweitzer wants to lower the minimum wage
Doug Schweitzer says he would cut Alberta’s minimum wage from $15 per hour to $12.20 per hour, because it is “right choice for Albertans whose livelihoods count on it the most.”
While he is likely referring to the livelihoods of business owners, it would be the wrong choice for the people impacted the most – the lowest wage working Albertans who would have their wages cut from $15 per hour to $12.20 per hour.
It is safe to say that Schweitzer has earned much, much more than $12.20 per hour at his downtown Calgary job as a partner at Dentons, the world’s largest law firm.
Here is what energy industry executives, progressive advocates and opposition politicians had to say about the Royalty Review panel report released on Friday, Jan. 29, 2016:
“Our new royalty framework recognizes the economic context of Alberta’s energy industry and the need to protect and promote good jobs. Our new system will gradually deliver greater revenue to Albertans while building a more competitive energy sector enhanced by greater transparency and performance measurements to allow Albertans to hold government and industry to our commitments.” – Rachel Notley, Premier of Alberta (press release)
“Our history of innovation has made Alberta into one of the world’s top energy producers. With the changing world we face today, it’s even more important to encourage innovation and ensure Alberta can compete. That way, everyone benefits. Our panel is proud to deliver these recommendations to improve our energy industry’s future.” – Dave Mowat, Royalty Review Advisory Panel Chair (press release)
“Virtually none of our concerns or suggestions are reflected in the royalty report… Those ideas were passed over in favour of a plan that could have been introduced by a PC or Wildrose government… We had high hopes at least some of those progressive alternatives would have found their way into the final report. But they didn’t.” – Gil McGowan, President of the Alberta Federation of Labour (reported in the Calgary Sun and AlbertaPolitics.ca)
“Together, we created a meaningful dialogue around the energy issues both in Alberta and across Canada. I believe that together, we have developed an enduring framework and set of recommendations that will contribute to Alberta’s future prosperity.” – Leona Hanson, Panel member and Mayor of Beaverlodge (press release)
“The most glaring omission is the complete absence of any kind of incentive for environmental improvement by industry. Under this new royalty system the government is rewarding the environmental status quo. Alberta’s energy industry is innovative and they deserve the opportunity to be rewarded for improved environmental practices. This is particularly prevalent in the decision to ignore the oilsands royalty process completely.” – David Swann, MLA for Calgary-Mountain View and interim leader of the Liberal Party (press release)
“The new royalty framework is principle-based and provides a foundation to build the predictability industry needs for future investment… The report recognizes royalties are just one part of the competitiveness equation for Alberta. With today’s economic situation, now is the time for industry and the Alberta government to work together on solutions that will make Alberta a world-class province to do business… Today’s announcement has been the result of a fair and credible process, one Albertans can trust.” – Tim McMillan, president and chief executive officer of the Canadian Association of Petroleum Producers (press release)
“They’ve done some good things that were laudable, but that keeping the royalty rates and structure was disappointing. There was a lot of room for improvement to capture a greater share of the resource generated by the industry in a high-price environment; holding the line doesn’t accomplish that.” – Ricardo Acuna, executive director of the Parkland Institute (Globe & Mail)
“I was impressed with the efforts of the Panel to understand and balance the interests of the public, the Province and the industry, but I was particularly impressed with how all of the input was considered and integrated to the Modernized Royalty Framework report. I believe the Panel’s recommendations significantly update and improve the Alberta royalty framework which should ultimately encourage investment in Alberta’s resources.” – Kevin Neveu, President and CEO of Precision Drilling Corp. (press release)
“Just like in our royalty plan, the panel has found that Albertans are getting a fair share from oil and gas royalties, and that our royalties today are globally competitive. As well, they also agreed with our plan that oil sands royalties are fair as-is, and that further transparency is needed. I urge them to take this one step further by compiling and issuing an annual Resource Owners Report, both to inform and educate Albertans as to the many ways we benefit from our energy industry.” – Greg Clark, MLA for Calgary-Elbow and leader of the Alberta Party (press release)
“We see this as a good start on increasing competitiveness and enhancing the province’s financial strength. We look forward to seeing the final details, but at this stage, we commend the Panel on delivering what looks to be a thorough and credible framework that can help Alberta companies compete in difficult market circumstances while providing a more transparent and suitable royalty system.” – Pat Carlson, CEO of Seven Generations Energy Ltd. (press release)
“Our heart goes out to the Albertans who suffered job losses because of the instability caused by calling the royalty review. The next step is to recover from the damage done by this review and the series of poorly thought out policies that are harming our energy sector. Alberta needs to start seriously evaluating how to restore our competitiveness on the world stage.” – Brian Jean, MLA for Fort McMurray-Conklin and leader of the Wildrose Party (press release)
“We are pleased the government has concluded that the oil sands royalty framework provides the appropriate share of value to Albertans. Completion of the royalty review provides certainty, predictability and helps increase investor confidence in the Province. Industry and government can now focus on initiatives to lower costs, improve efficiencies and enhance environmental performance—all with the goal of getting Albertans working again.” – Bill McCaffrey, President and CEO of MEG Energy Corp. (press release)
“It is no surprise to see that the Panel found the existing royalty structure to be fair and equitable for Albertans. It’s sad that this government had to create such havoc within the industry only to find out that the regime created by the Progressive Conservatives gives Albertans their fair share of resource revenues.” – Richard Gotfried, Progressive Conservative MLA for Calgary-Fish Creek
The Royalty Review wraps up the second major review panel launched by the NDP after their win in the 2015 provincial election. The report from Alberta’s Climate Change panel represents a more meaningful shift by the government by phasing out dirty coal fired power plants and introducing a carbon tax. As the Climate Change report represents sweeping change, the royalty review panel embraces the status quo.
“It is not the time to reach out and make a big money grab. That just is not going to help Albertans over-all right now, and so I feel quite confident that this is the right direction to take,” Ms. Notley told the news conference in Calgary yesterday.
The decision to keep royalty rates the same is a 180 degree turn from the feisty NDP opposition we knew ten months ago, which claimed Albertans were not getting their fair share from royalties under the old Progressive Conservative regime.
It was also a sharp contrast from the words we heard from the chairman of the province’s previous royalty review. In 2007, Bill Hunter wrote that “Albertans do not receive their fair share from energy development. Albertans own the resource. The onus is on their government to re-balance the royalty and tax system so that a fair share is collected.”
If you were payingattention to the moderate language Ms. Notley and NDP cabinet ministers have used when discussing royalty rates since forming government and launching this review panel in mid-2015, you might be less surprised.
With the government’s messaging in mind, it is not shocking that the NDP did not choose to ignore the panels recommendations and impose sweeping changes that many Albertans, including myself, felt were needed. It is my belief that our resource royalties should have been raised to ensure that Albertans are actually getting their fair share when oil prices are high. This report does not do that.
While the decision to accept the status quo on royalty rates will certainly be a divisive issue within the NDP caucus and party, it demonstrates that Ms. Notley is not a partisan ideologue.
The NDP would have faced a severe political backlash from its right-wing opponents, the energy industry, and thousands of Albertans nervous about the state of the economy if they had jacked up royalty rates yesterday. In the short-term, with the current economic situation in mind, it is a smart political decision to keep royalty rates the same, but in the long-term it represents a missed opportunity for Albertans.
Closing the door to royalty increases will also not help solve the revenue shortfall caused by the drop in the international price of oil. After enjoying decades of high oil and natural gas prices, the old conservative government became over dependent on resource royalties to fund the province’s operations budget. With international oil price dropping, the new government now faces a significant shortfall in revenue.
By accepting current royalty rates, the government has also rebuked months of hyper-partisan rhetoric and nasty attacks from Wildrose leader Brian Jean, who claimed the review was risky, ideological and would “not be independent or fair.” It is troubling that Mr. Jean and his party are opposed to even the concept of reviewing Alberta’s resource royalty rates, something that should be done by the Alberta government on a regular basis to assess whether our rates are competitive.
Creating mechanisms for increased transparency around royalties is one positive outcome of this review. The report recommends the annual publication of a capital cost index for oil and gas wells and the costs and royalties paid for each oil sands project. The Auditor General has reported numerous times that the old Conservative government was not properly tracking whether Albertans were receiving the royalty rates they were owed.
Significant new investment in the Heritage Fund when oil prices do rise again will pay off for Albertans in the long-term. In their 2015 election platform, the NDP campaigned on the promise that “100% of incremental royalty revenue, above the sums earned by Alberta under the current regime, will be invested into Alberta’s Heritage Fund.”
Many Albertans will disagree with the report’s claim that Albertans are currently receiving our fair share from resource royalties. Others will claim it will limit the government’s options for dealing with the revenue shortfall. But, for better or worse, it does show the evolution of Ms. Notley and her party from leftish opposition into a moderate government. For better or worse, yesterday we saw Rachel Notley boost her credentials as a pragmatic Premier of Alberta.
Ms. Notley proved to be a smart, likeable and charismatic leader on the campaign trail. I would argue that she was then and remains now her party’s greatest asset.
Voters opted for wholesale change by choosing 75 new MLAs, a huge turnover, to serve in Alberta’s 87 seat Legislative Assembly. The NDP started the election with 4 seats and ended it with 54 seats, including every seat in Edmonton, 15 seats in Calgary, seats in Lethbridge, Medicine Hat and Red Deer, and a handful in rural Alberta.
The PCs lost a total of 60 seats and were relegated to third place with 10 MLAs (9 after leader Jim Prentice resigned on election night) and the official opposition Wildrose won 21 seats, four more than the party won in 2012.
A record number of women were elected to the Legislature, including 26 in the 54 MLA NDP caucus and 7 of 13 cabinet ministers.
Thomas Dang, age 20, became the youngest MLA in Alberta history.
Optimism was in the air as thousands of Albertans showed up to the Legislature Grounds to watch the new Premier and cabinet be sworn-in to office.
In their first session as government, the NDP banned corporate and union donations, restored $1 billion in health care, education and human services funding cuts made by the PCs, increased Alberta’s corporate tax rate from 10 percent to 12 percent and announced a phased in $15 per hour minimum wage by 2018.
Ms. Notley demonstrated an ability to reach outside NDP circles for expert advice by appointing Alberta Treasury Branches President & CEO Dave Mowat to lead a Royalty Review Panel, respected economics professor Andrew Leach to lead a Climate Change Panel, and former Bank of Canada governor David Dodge to provide advice on infrastructure investment. Calgary Liberal MLA David Swann was asked to co-chair a review of the province’s mental health services and Joseph Doucet, Dean of the University of Alberta’s School of Business, was tapped to chair the Premier’s Advisory Committee on the Economy.
The PC Party patronage machine ground to a halt. University and college boards of governors are still dominated with well-connected conservatives, but some high-profile appointees have been replaced. For example, Alberta’s representative in Washington D.C. Rob Merrifield, a former Conservative MP, was replaced by Gitane De Silva, a former Deputy Minister of International and Intergovernmental Affairs and Canadian Consul General to Chicago.
On the financial front, the NDP government faces serious problems inherited from the old PC government.
After years of poor long-term planning and over-reliance on royalty revenues to fund the province’s operations budget, the sharp decline in the international price of oil had a huge impact on the government’s coffers. The drop in the price of oil has also led to significant job losses in Calgary and northern Alberta, which have impacted tens of thousands of Albertans.
Instead of dealing with the drop in revenue by cutting budget funding and slashing public sector jobs, like the Wildrose and PC parties proposed, the NDP have decided to invest in public infrastructure, such as highway, school and hospital construction.
As well as keeping many Albertans in the construction industry employed during the economic downturn, investing in building public infrastructure now means the government will spend less time playing catch up when the next oil boom arrives. Ironically, this is similar to what Wildrose leader Brian Jeanargued in favour of when he resigned as Fort McMurray’s MP in January 2014.
Despite a constant barrage of criticism from conservative critics, who claim the NDP election win was simply a fluke, a recent poll showed the NDP with a narrow lead in Calgary and a wide lead in Edmonton. The poll was not fantastic news for the governing party, but it undermines the argument that the NDP were elected by accident. The NDP appear to be developing a solid base of support among moderate and progressive voters in urban Alberta.
This election was a reminder that Alberta has defied its stodgy political stereotype and has rapidly become a young and urban province.
The city of Calgary, long known for its conservative political roots, has now elected progressive politicians in the municipal, provincial and federal levels of government, something that would have been unheard of in past years.
According to Statistics Canada, in 1961, 53 percent of Albertans lived in rural areas. As of 2011, 83 percent of Albertans lived in urban centres with only 17 percent of our province’s population living in rural areas. This is a massive population shift that has and will continue to impact our political map for decades to come.
The year’s election was a rejection of establishment politics and a reminder that Albertans are largely politically moderate and more populist than conservative, which is an important distinction that the ruling PCs forgot after 44 years in power. It was also a reminder of how dramatically voters can abandon their traditional patterns of voting and embrace change.
This year was filled with many exciting firsts for progressive politics in Alberta. And while it is impossible to tell what the next year will bring in Alberta politics it is clear that our province changed in a significant way in 2015.
I had the pleasure of joining Ryan Jespersen on 630CHED on Dec. 16, 2015 to talk about the past year in Alberta politics. Take a listen and let me know what you think about what happened in 2015.
Alberta’s new NDP government has taken steps to fulfill one of their key election promises by appointing a panel to ensure Albertans are receiving their fair share from their natural resource wealth through the royalty rates paid by the oil industry to the Alberta government.
The choice of Alberta Treasury Branches President Dave Mowat, energy economist Peter Tertzakian, former Alberta deputy minister of finance Annette Trimbee, and Mayor of Beaverlodge Leona Hansonto review Albertans royalties should calm any anxiety industry leaders may have had with this process. These are sensible choices for this important review.
Like the panel reviewing Alberta’s climate change strategy, the royalty review panel is stacked with knowledgable appointees who cannot be accused being partisan New Democrats. And while some industry leaders are still uncomfortable with this year’s election results, Mr. Tertzakian has some advice for conservative-connected business leaders.
“The industry needs to have more than just an open mind — I think you have to go with forward thinking and that this is an opportunity to get away from business as usual,” Mr. Tertzakian told a business reporting website after Rachel Notley‘s NDP was elected with a majority government on May 2015.
The appointment of Mr. Tertzakian received immediate praise online from two prominent conservative voices – former Wildrose MLA Heather Forsyth and former Wildrose leader Danielle Smith.
The panel has an important task ahead of it and has a mandate to “optimize” returns to Albertans as owners of the resource, industry investment, diversification opportunities, such as value-added processing, and responsible development of Alberta’s resources.
Bill Hunter, who chaired the 2007 royalty review panel established by former Premier Ed Stelmach, wrote in his final report that “Albertans do not receive their fair share from energy development. Albertans own the resource. The onus is on their government to re-balance the royalty and tax system so that a fair share is collected.”
Nearly a decade after Mr. Hunter penned those words, the responsibility once again falls on Alberta’s government to ensure that Albertans are receiving their fair share from energy development.
It is up to the current panel to consult with Albertans and industry to determine what that proper balance will be.
Part of that balance will be timing, as Energy Minister Marg McCuaig-Boyd told reporters today that any changes to royalties will not be implemented until 2017. And like any other panel review, Ms. McCuaig-Boyd and Ms. Notley have the leeway to ignore any recommendations that might appear to be politically unpalatable or carry too much risk. This is why government’s like to employ these types of panels to review potentially controversial policy changes.
But others, like Alberta Oil Magazine editor Max Fawcett, argue that now is the perfect time for a royalty review. Canadian Association of Petroleum Producers president Tim McMillan has said he does not want the government to delay the review, and even Mr. Stelmach has said the review should happen.
Comparisons can be made to a rookie PC government led by Peter Lougheed, which reviewed royalties during its first year in office, to the consternation of industry leaders who had grown accustomed to a comfortable relationship with the old Social Credit government.
“The oil companies, not unexpectedly, are howling – while the natural gas industry is quaking in its boots because the government also has made clear it is going to change its taxes in the fall,” the Ottawa Citizen reported on May 8, 1972.
“This is a sale of a depleting resource that’s owned by the people. Once a barrel of oil goes down the pipeline it’s gone forever. It’s like a farmer selling off his topsoil,” Mr. Lougheed once said while encouraging Albertans to think like owners.
As the owners of the resources, Albertans deserve to know whether we are getting our fair share. But the result of a royalty review is made more important if the government does something meaningful with the funds collected through the rent of our natural resources.
Alberta launched the Alberta Heritage Savings Trust Fund in 1976. Under Mr. Lougheed’s leadership, the Heritage Fund initially received 30% of government resource revenues and was worth $12.7 billion in 1986, when the PCs began a 17 year freeze on new deposits into the fund. The Heritage Fund is now worth only $17.4 billion. Despite an embarrassment of riches during most of its 44-years in power, the old conservative government proved to be poor financial managers once Mr. Lougheed retired.
In their 2015 election platform, the NDP campaigned on the promise that “100% of incremental royalty revenue, above the sums earned by Alberta under the current regime, will be invested into Alberta’s Heritage Fund.”
The current downturn in the price of oil will certainly change some of the new government’s short-term plans when the budget is tabled in October 2015, but significant investment in the Heritage Fund when oil prices do rise again will pay off for Albertans in the long-term. And ensuring that the owners – Albertans – are receiving their fair share from energy development, as Mr. Hunter wrote in 2007, will be key to this long-term planning.