Annex 7: Resource Revenues

How should Equalization deal with the volatility of resource revenues?

Figure 2 illustrates the much greater annual volatility of measured natural resource capacity (under the RTS and with full inclusion) than the measured capacity of other provincial revenues.

Figure 2 – Volatility of Resource and Non-resource Tax Bases
(percentage deviations from trend, 1982–83 to 2004–05)

This volatility is mostly the result of world commodity prices, but it also reflects the multiple types of resource revenues (e.g., auction revenues, royalties, etc.) yielding different levels of fiscal capacity at different times. This volatility can result in large and unpredictable swings in Equalization entitlements, complicating the process of fiscal planning for provinces. Whether the RTS revenue bases are retained or replaced by any alternative measure, this volatility in Equalization payments will continue unless new mechanisms are put in place.

The Panel’s view on reducing volatility

The Panel is recommending a three-year moving average of all revenues. Further details are presented in Annex 8 on stability and predictability. This should go a long way to smooth out resource revenues entering the Equalization formula and the attendant volatility in payments. A smoothing mechanism will be particularly important if a 10-province standard that includes 50 percent of Alberta’s volatile resource capacity is adopted.

The Panel has examined the option of using a longer moving average for resource revenues than for other tax bases. It concluded, however, that the added stability was generally not worth the added complexity and the further reduction in responsiveness of the program to own-source revenue fluctuations.

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