Bringing back the Revenue Forecast Allowance is essential for restoring trust in Alberta’s revenue forecasting system
With renewed talk about the prospects for budget deficits in Alberta, the spotlight has once again been shone on Alberta’s revenue forecasting record.
The province’s most recent annual reports show that, in 2020/21, the total revenue in Alberta fell short of projections by -14 percent, or -$6.9 billion; in 2021/ 22, the total revenue in Alberta exceeded projections by 56 percent, or $24.6 billion; while in 2022/23, the total revenue in Alberta exceeded projections by 22 percent or $13.9 billion. The persistence of a high degree of revenue forecasting risk undermines trust in revenue forecasts within Alberta budgets and mid-year fiscal updates, affecting public confidence.
How do we restore trust in Alberta’s revenue forecasting system and regain public confidence?
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In 2019, as Executive Director of the MacKinnon Panel on Alberta’s Finances, I examined best practice mechanisms to improve revenue forecasting systems in Alberta. After looking at a number of different options, I recommended to the Panel that a formal ex-ante buffer be established in the revenue forecast, known as the Revenue Forecast Allowance.
Ex-ante is a Latin term that refers to analysis, assumptions, or decisions made before an event occurs or before the consequences of an action are observed.
Based on my work, the MacKinnon Panel on Alberta’s Finances focused on a formal ex-ante revenue cushion to ensure that uncertain revenue forecasts did not drive spending targets. The Panel recommended that a revenue buffer, known as the Revenue Forecast Allowance, be set as a percentage of Alberta’s total revenues after the budget was balanced. This formal buffer would initially be set at 0.75 percent of total revenues, increasing gradually to 1.25 percent of total revenues over a three-year period.
In Budget 2019 and Budget 2020, the government adopted the MacKinnon Panel recommendation by adding a Revenue Forecast Allowance of $450 million in 2022/23. However, the Revenue Forecast Allowance was dropped in Budget 2021 and has not been seen since. My understanding is that the Alberta government has instead built in an informal buffer using the West Texas Intermediate (WTI)/Western Canadian Select (WCS) differential to reflect revenue volatility, but this practice has not been publicly explained to Albertans, nor is it fully transparent.
Other provinces have acknowledged the difficulty in forecasting revenues by building formal buffers into their revenue outlooks.
In the 2023 B.C. budget, a forecast allowance of $700 million has been established for 2023/24, with a $500 million forecast allowance for 2024/25 and a $500 million forecast allowance for 2025/26. The forecast allowance helps offset the impacts of revenue volatility and statutory spending.
The 2023 Ontario budget incorporates prudence in the form of a reserve to protect the fiscal outlook against unforeseen adverse changes in the province’s revenue and expense, including those resulting from changes in Ontario’s economic performance. The reserve has been set at $1 billion in 2023/24, $2 billion in 2024/25 and $4 billion in 2025/26.
In the 2023 Quebec budget, a contingency reserve of $1.5 billion in 2023/24, $1 billion in 2024/25 and 2025/26, and $1.5 billion in 2026/27 and 2027/28 was established due to the uncertainty affecting the economic context and to offset the effects of a sharper-than-expected economic slowdown, should one occur.
Reflecting this best practice in revenue forecasting in other provinces, I recommend that the Alberta government build a formal ex-ante cushion into its revenue forecast, beginning in 2024/25, using a Revenue Forecast Allowance. The Revenue Forecast Allowance should be based on a percentage of total revenues, starting at one percent of total revenues in 2024/25 and reaching three percent of total revenues by 2027/28, once fully phased in. If the Revenue Forecast Allowance is not fully required by the end of the fiscal year, the residual would be applied towards debt repayment.
Establishing a Revenue Forecast Allowance would help mitigate revenue forecasting risk in Alberts and enhance the credibility of and public confidence in the government’s revenue forecasts.
It is time to bring back the Revenue Forecast Allowance as part of Alberta’s revenue forecasting system.
Lennie Kaplan is a former senior manager in the Fiscal and Economic Policy Division of Alberta’s Ministry of Treasury Board and Finance (TB&F) where, among other duties, he examined best practices in fiscal frameworks for oil and gas-producing jurisdictions, including best practice in revenue forecasting. He recently retired from his position as Executive Director of Research at the Canadian Energy Centre.
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