Alaska’s $3 billion budget hole

Unlike its Alaskan cousin, the Yukon legislature never invites economists to present their views while it deliberates the budget. After viewing the Powerpoint presentations Alaskan economists recently made before the Alaska Senate’s labor and commerce committee, I can see why.

Unlike its Alaskan cousin, the Yukon legislature never invites economists to present their views while it deliberates the budget.

After viewing the Powerpoint presentations Alaskan economists recently made before the Alaska Senate’s labor and commerce committee, I can see why.

The legislature is already depressing enough.

Alaska is in the throes of a major fiscal crisis thanks to the collapse in global oil prices. “This is our Great Recession,” said one gloomster from the University of Alaska’s Institute for Social and Economic Research, according to the Juneau Empire.

The state will “lose six to seven per cent of jobs in the state of Alaska before we get through this,” added an economist from an outfit called Northern Economics. The Empire reports this would be even worse than the legendarily bad bust that followed the 1970s pipeline boom.

The gurus from Northern Economics made their point with the subtlety of a series of blows from an eight-pound splitting maul. The state’s gross domestic product went from US$51 billion in 2012 down steadily to an expected US$40 billion in 2016. The year-over-year change in the number of jobs has been falling steadily and went negative in 2015. The economy bottomed through the long-term trend in wage growth around the same time. Household confidence went off a cliff in mid-2015. Jobs started to disappear in high-earning sectors such as construction, oil and gas, and professional services in mid 2015. State jobs started to shrink in 2015 and even retail jobs went south at the end of 2016.

University of Alaska economists piled on, pointing out that the hole in the fiscal 2017 budget was a stunning US$3 billion. If they cancelled Alaska’s beloved citizen dividend and managed to earn 4.5 percent per year on the state’s $60 billion permanent fund, this would close 90 percent of the gap.

But if they keep a dividend of US$1000, barely half the 2014 amount, the gap balloons back to US$1 billion.

The state budget for the upcoming fiscal year proposed by Governor Bill Walker in December had the state’s core operating budget 23 percent smaller than two years prior. The cuts have been sweeping, detailed in a nine-page list from the governor’s office. They include things like drinking water regulation for communities of less than 25 people, reduced food inspections, tourism marketing, 17 vehicles from the State Trooper fleet and beds in youth detention facilities.

To show he shares the pain, the governor gave himself a one-third pay cut.

Debate now rages about what is the best mix of further cuts, permanent fund earnings and reductions in the treasured citizen dividend. Even — gasp! — a state income tax is on the table. Fiscally conservative republicans in the state Senate are looking for hundreds of millions in additional cuts, while Democrats and moderate Republicans in the House have voted for proposals that focus more on new revenue than further spending reductions.

So what does this mean for the Yukon?

First of all, Alaska will be pushing even harder than before to get new mining, oil and gas projects, and the jobs and tax revenues they bring. This may have implications for B.C. and Yukon projects competing for the same customers or investors.

More broadly, I suspect that Yukoners of various stripes may see very different lessons in the crisis facing our friends in Alaska.

Those opposed to a Yukon oil and gas industry would point out that you can’t have a fiscal crisis due to falling energy prices if you don’t have an energy industry.

Yukoners on the other side of the political spectrum might retort that Alaska’s travails are due to politicians of both political parties succumbing to the temptation to boost government spending during good times. Alaska’s level of government spending per person, even under Republican governors, is among the highest in the United States. Had more of the oil money been saved in the permanent fund, they might say, the state would not be in such trouble today.

The debate is academic for us as long we get transfer payments from our federal government that are so much more generous per person than Alaska gets from Washington, D.C. We are even more dependent on the gusher we struck in Ottawa than Alaska is on the North Slope oil wells.

The economies of the Yukon and Alaska underline how difficult it is to build a stable and prosperous economy in the North without the support of oil, gas, minerals or government money.

If there is a silver lining in Alaska’s dark cloud, it is that they may be able to restructure their economy to survive with permanently lower oil revenues. The interest on the US$60 billion they have saved up in their permanent fund from two generations of oil production will certainly help.

It will be a painful process. But we should wish them luck, and not complain if we find ourselves seeing higher taxes on our dinner bills in Skagway and paying a bit more for our fishing licenses in Haines.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.

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