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OTTAWA— China is becoming a key line item in the budgets of Canada’s resource-rich provinces.
From Alberta and Saskatchewan in the West to Quebec in the East, China’s thirst for commodities such as oil, fertilizer and iron ore is no longer just about jobs and economic activity – the gusher of royalties is also helping provinces balance, and even pad, their books.
On Wednesday, Saskatchewan unveiled a budget with a small surplus for 2012-13 thanks to sharply higher oil and potash royalties. Potash will bring in $705-million, up 36 per cent from last year. Oil will generate another $1.6-billion in royalties, up 8 per cent. Saskatchewan now gets nearly 30 per cent of its revenue from various resource royalties.
Quebec Finance Minister Raymond Bachand predicted on Tuesday that royalties from the province’s booming mining industry will grow nearly tenfold over the next decade, putting $4-billion into provincial coffers.
In Alberta, resource royalties represent nearly 40 per cent of revenue and are headed toward 50 per cent. Alberta Finance Minister Ron Liepert predicted a “gusher” of revenue for the province from the oil sands, creating ever-larger surpluses in the years ahead.
But even as provinces increasingly count on rising demand for their resources, economists warn that booms can quickly fade, putting at risk the revenues from high commodity prices and the multibillion-dollar investments in mines and oil sands.
“It’s always a risk when you depend on global markets for anything,” said CIBC World Markets economist Warren Lovely.
History has shown that provinces are also notoriously bad at smoothing out the wild gyrations in the boom-bust resource sector. They often spend based on the expectation of future revenues, without saving enough for rainy days.
“The best thing the provinces can do is treat royalties as an intermittent return on an investment,” said Finn Poschmann, vice-president of research at the C.D. Howe Institute in Toronto. “They should bank the money and use it to fund expenses in the long term.”
He pointed out that Alberta has squandered much of the $10-billion it once had in its Heritage Fund. “It’s used as a piggy-bank to be broken,” he said.
The key, he said, is good governance of those funds and discipline.
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