by Michael Holden, Senior Economist
Resource royalties are a valuable source of revenue for provincial governments in western Canada. In fact, they have been rising steadily in importance since the early 1990s and are nearly as important to provincial government revenues today as they were at the tail end of the 1979 energy crisis . While royalties are a boon to governments’ bottom lines, they present considerable challenges when it comes to long-term planning and fiscal management.
I began examining trends in royalty income as part of my preliminary work on the Canada West Foundation’s "Powering Up" Project. My colleagues and I have been working on creating a detailed and comprehensive snapshot of the existing energy system in the four western provinces, including the impact of resource extraction on government revenues.
In 1981, resource royalties accounted for 23.8% of all provincial government revenues in western Canada. There was a considerable range from province to province: in Alberta, royalties were as high as 43.2% of revenues, while the corresponding figures for Saskatchewan (21.0%), BC (5.6%) and Manitoba (1.4%) were much lower.
After tumbling in the 1980s and early 1990s, a surge in oil and other commodity prices in the mid to late 2000s have meant that royalties are once again a major source of income in the region, particularly in the three western most provinces. For western Canada as a whole, royalties made up 20.6% of government revenues in 2008 (the most recent year for which Statistics Canada data are available). Alberta still leads the pack at 33% of provincial revenues, but Saskatchewan and BC have seen the importance of resource royalties grow considerably since the early 1980s. In Saskatchewan, royalties grew to 24.1% of provincial revenues in 2008, while BC saw the share of income from royalties double to 11.2%.
Is this increasing reliance on royalty revenues a good thing for the western provinces? It really depends on your perspective. On one hand, royalties provide governments with more available funds to spend on goods and services—like health care, education, and infrastructure—or to put towards deficit elimination or debt reduction. This, in turn, eases the burden on provincial taxpayers; the more government revenues that come from resource rents, the less taxpayers have to pay out of our own pockets. By reducing the fiscal burden on taxpayers, royalties also contribute to creating a more competitive tax environment which could help attract businesses, investments and skilled workers to western Canada.
However, overreliance on resource royalties comes with its own set of problems. For one, royalties and royalty rates are closely linked to commodity prices which are notoriously volatile and completely beyond our control. While all government revenue sources are prone to fluctuations, royalty income is far more erratic than most. Responsible fiscal planning is an extraordinary challenge when a major source of revenue can fluctuate so dramatically, and unexpectedly, from one year to the next. How do governments make stable, predicable and long-term spending commitments in such an environment? How do they resist the pressure to increase spending when royalty income rises? And how do they maintain that spending level in the face of a negative price shock?
Additionally, the resources in question are non-renewable. To be sure, some of our resource deposits—like the oil sands—are vast, and some like shale gas are only beginning to be developed, but even these won’t last forever. Moreover, environmental concerns and development of alternative energy sources could change future market conditions in unforeseeable ways.
Should we be concerned about the long-term sustainability of our royalty revenues? Should some of this resource wealth be saved for future generations? Are Albertans missing out on the opportunity to add to the Alberta Heritage Savings Trust Fund and convert part of their present wealth into a form that could provide interest revenue in perpetuity? Should Saskatchewan re-introduce its Heritage Fund? Should BC consider starting up such a fund? These questions are further explored in the Canada West Foundation’s "Investing Wisely" Project.
These questions all require careful study and debate in the community, but two things are immediately clear. First, as resource royalties grow in importance for provincial governments in western Canada, steps need to be taken to minimize the impact of resource price volatility on government revenues. Secondly, better public policy is needed to ensure that both current and future generations benefit from present-day extraction of non-renewable resources.
Michael Holden is Senior Economist and is currently working on creating a detailed and comprehensive snapshot of the existing energy system in the West as part of the Powering Up Project.