It’s the dollar, stupid

For Albertans, a strong Canadian dollar is a double-edged sword. On one hand, Albertans can vacation longer in Florida, gamble more in Las Vegas or get a steamin’ deal on a car just across the U.S. border. On the other hand, a high dollar means fewer bucks in the provincial treasury, placing pressure on an already high deficit. And, the larger the deficit, the more likely the province will implement spending cuts or tax hikes.

For Albertans, a strong Canadian dollar is a double-edged sword. On one hand, Albertans can vacation longer in Florida, gamble more in Las Vegas or get a steamin’ deal on a car just across the U.S. border. On the other hand, a high dollar means fewer bucks in the provincial treasury, placing pressure on an already high deficit. And, the larger the deficit, the more likely the province will implement spending cuts or tax hikes.

The Alberta government has long enjoyed the benefits afforded by the oil and gas industry. The royalties paid to government since 1981 have provided an average of 27 per cent of all government revenues, and have helped pay for Albertans’ education, health care, roads and more.

Even though groups too numerous to list (including the Canadian Taxpayers Federation) long warned the provincial government not to become too reliant on these oil and gas revenues, and to start saving them rather than spending them – they did anyway. The province now brags of spending more than double the per capita national average on infrastructure, and is the second highest spending province in the nation on government programs (Newfoundland and Labrador is the only one higher on a per person basis).

Indeed, out of control spending is the reason why the province is mired with a $4.7-billion deficit this year – the largest one in Alberta’s history. In fact, once debt-free had the province limited its annual spending growth to match the growth in the population and inflation, the province would be running a $2.9-billion surplus.

Regardless, the province procrastinated on any major cuts in this year’s budget, and instead threatened to find $2 billion in “fiscal correction” (read: spending cuts or tax hikes) next year unless the price of oil and gas returns to near record levels.

But oil and gas prices should be the least of the finance department’s worries.

If oil ends up averaging $60U.S. for the entire fiscal year, it will mean an additional $644 million in revenues for the province. Natural gas prices may be low right now, but it tends to be low during summer months and then ratchets up in the winter when we start firing up our furnaces. However, industry predictions are suggesting natural gas prices aren’t likely to top $6 any time soon. In all likelihood, gains on the oil side will off-set losses from natural gas, and have little impact on the size of our deficit.

However, the real kicker for the Alberta government could be the dollar. Budget 2009 predicted the Canadian dollar to be worth 83.5 cents U.S. For every 1 cent increase in the Canadian dollar, the Alberta government loses $221 million in revenues. This is largely due to the fact that we export much of our oil and natural gas to the US, and that oil is sold in US dollars.

If the Canadian dollar continues to hover around 90 cents, this has the potential of hiking our deficit to over $6 billion this year. A dollar at par – as TD Securities has suggested it will be by the end of 2009 – would drive Alberta’s deficit even larger. But with the US government facing an estimated $1.84-trillion deficit this year – four times larger than the largest deficit in US history – 2010 may even see the Canadian dollar above par.

A dollar above par may been a boon to Albertans looking to buy a condo in Arizona, but it will hurt the oil and gas sector, hurt the Canadian export business and push the Alberta government’s deficit even higher.

And a higher deficit, combined with a year of government inaction on finding spending cuts, can only mean one thing: tax hikes.

So don’t buy that condo in Yuma just yet, you might need the extra dough to pay your soon-to-be-rising tax bill.

Scott Hennig is Alberta director of the Canadian Taxpayers Federation.

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