Improving conditions for the oil and gas industries may be the low hanging fruit for a fiscally challenged government.
For Conservatives, winning the next federal election comes with a downside. The Trudeau Liberals have saddled Canadians, and the Poilievre government in waiting, with an unprecedented burden of public debt. If, more likely when, the Conservatives form a government they will be required to exercise a level of financial prudence and restraint in some ways tantamount to being fiscally handcuffed.
Nevertheless, repairing much of the damage done by Trudeau government policies to Western Canada’s petroleum and natural gas sectors is achievable. This is principally because some of the more urgent changes sought by supporters of those industries have the potential to more than pay for themselves over the medium term.
Consider for example, completion of a new pipeline to Pacific tidewater with the 520,000 barrels per day capacity of the cancelled Northern Gateway. Such a line would have the potential to deliver an additional $13.3 billion worth of prairie oil to international markets annually.* That new revenue would be reflected in higher corporate revenues and profits, new jobs and higher government royalty and tax revenues. But there are several caveats to address before that sort of development can occur.
The west coast Tanker Ban/Bill C-48 will need to be repealed or appropriately amended. No less critical will be streamlining the pipeline approval process introduced in Bill C-69. The current approval process is excessively cumbersome and costly.
The Liberals got a taste of their own medicine beginning in 2018 when they took over the Trans Mountain expansion. The radical rules regime imposed by Bill C-69 was largely responsible for the delays that generated $34 billion in cost overruns. The Trudeau pipeline approval legislation is the consummate example of a BANANA law (build absolutely nothing anywhere near anything). It is simply untenable in a modern industrial country working toward healthy levels of economic growth.
While there are a number of low cost-high return policy changes that can be made to improve prospects in the gas and petroleum sectors, the Liberals have painted their successors into a financial corner that will limit the scope of what they can achieve. The next government will face some big challenges undoing what it took the Liberals nine years to do, while at the same time getting a grip on excessive spending and an unacceptable level of national debt.
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The size of the fiscal mess
According to the Fraser Institute’s Grady Munro and Jake Fuss, in fiscal 2024-2025 Canada’s gross federal debt will reach $2.1 trillion. Munro and Fuss estimated the federal debt load to be nearly 70% of GDP for 2024-25. Federal gross debt currently amounts to $51,000 for every man woman and child in Canada.
The annual charges incurred servicing the federal debt nearly doubled from $24.5 billion in 2021-2022 to $54.5 billion for 2024-2025. According to Munro and Fuss, the high cost of those debt obligations squeezes out funds for everything else governments need to do.
Debt servicing costs for the current fiscal year will be over twice the $26.5 billion it cost to operate the Department of National Defence; over twice as much as the Canada Health Transfer to the provinces; and more than two times the $25.3 billion delivered to the have-not provinces under Canada’s equalization program.
Chalking up over a trillion dollars in debt is an outcome to be expected from a prime minister who believes budgets and economic benchmarks are mere numbers and that deficits take care of themselves. Besides, you can’t pinch pennies if you want to virtue signal on a global scale. Furthermore, Trudeau knows he can leave his financial mess for the next government to clean up; all the while relishing the thought that he has limited his successor’s ability to launch new initiatives.
The Poilievre government will need to engage in a delicate balancing act. They need to work toward eliminating deficits and reducing the debt. But they will want to do it without imposing big tax increases and spending cuts that are so unpopular they become a one-term wonder. At the same time there will be important Conservative commitments in need of funding. For instance, Canada needs to increase its support for the military to meet our NATO commitments and safeguard our sovereignty. And, the government can’t be so tight-fisted it fails to adequately respond to natural and economic emergencies.
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What not to do
There are strategic errors that can derail a financially responsible government’s efforts to achieve the balance needed to do what must be done and still remain popular enough to stay in office. There is a cynical political maxim that says if a government has bad news to deliver it is best done early in its first term. The idea being voters’ memories of tough measures taken early will fade from memory by the time the next election rolls around. Then, as election time approaches they can buy back support with vote getting gimmicks and giveaways. Governments should be exceedingly careful when employing that strategy.
As usual there are lessons from the past that are useful to review. The experience of Roy Romanow’s NDP government in Saskatchewan offers one of the more memorable examples of how not to deal with deficits and high debt. Probably the most important of those lessons is that, contrary to the popular maxim, it is sometimes a mistake to move too far too fast when applying fiscal restraint. If the first steps are exceedingly harsh or appear hugely unfair they can be remembered for decades.
When they formed government in 1991 the Romanow NDP inherited an unprecedented level of public debt from the Progressive Conservative government they replaced. By the time the PC’s lost the 1991 provincial election servicing the debt was the fourth or fifth most expensive line item in the provincial budget.
Hand wringing New Democrats were concerned that the province was on the brink of insolvency and default. Accordingly, early in his first term Romanow chose to take bold and decisive action to improve the province’s financial position. Staunch fiscal conservatives loved him for it. Voters in rural Saskatchewan never forgave him for it.
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Looking for big savings in its first term the NDP closed 50 hospitals in rural Saskatchewan and the Plains Hospital in Regina (the Plains had been built to support rural health care). It was often the case during the 1980s and 90s that the wages of nurses and other rural hospital employees were about the only thing keeping a good number of family farms solvent.
They also moved a $188 million surplus from the Gross Revenue Insurance Plan (GRIP), the major farm safety net program of the day, into the general revenue fund. This allowed the NDP to produce Saskatchewan’s first balanced budget in 15 years. They were able to take a fiscal victory lap at farmers’ expense.
Farmers in Saskatchewan would long remember “how the NDP stole their GRIP money.”
Making matters worse, the Romanow NDP were a one trick pony. Sure, they were good at wrestling deficits and debt, but that’s about all they could manage. They had no vision for building a brighter future and provided very little legislative sugar to help their fiscal restraint medicine go down.
In the Saskatchewan provincial election held this past October, some three decades after the election of the Romanow government, the NDP were once again frozen out of rural Saskatchewan. They did well in the two major cities but didn’t win a seat in rural areas and it cost them the election.
Admittedly the foregoing assessment probably involves unnecessary angst. Pierre Poilievre is a bright guy. And a Conservative politician who celebrates common sense is clearly more likely to get the balance right than anyone offered up by the NDP or the Liberals.
* The $13.34 billion figure assumes the new pipeline has 520,000 barrels per day capacity and operates at full capacity 365 days per year.
It further assumes the oil transported will be sold into non-US international markets at the Brent Price but subject to an estimated 20% discount reflecting ocean shipping costs and the added expense of dealing with diluted bitumen. The amount of the discount estimate is likely too high. This is because of a growing proportion of enhanced, partially- processed “synthetic crude” in Canada’s exported oil. Synthetic crude has a much lower differential (discount) than what is charged against regular diluted bitumen.
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