Alberta faces structural deficit even if oil rebounds, TD says

The government of Alberta could be facing a long-term deficit situation for reasons beyond the temporary plunge in oil prices, TD Bank said in a report Thursday.

Economists Jonathan Bendiner and Derek Burleton say the province's current estimate of a $7-billion budget shortfall might not be realistic and the government could be facing much more serious fiscal challenges — namely, a structural deficit.

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Unlike what's known as a cyclical deficit, which is when governments temporarily dip into the red because of a temporary slowdown in the business cycle, a structural deficit is a situation where a government spends more than it earns even after the real economy rebounds, because of the compounding impact of debt payments.

Alberta is set to unveil its latest provincial budget next Thursday. Policymakers have already signalled to expect spending cutbacks, but the bank's report says it doubts those alone will be enough to fix Alberta's long-term financial problems.

"While the government has discussed a number of policy tools to address its fiscal challenge, a slash and burn approach to achieving fiscal balance in quick time can be costly to the economy and does not address current inefficiencies in program spending and an over-reliance on non-renewable-resource revenues," the TD report says.

Oil forecast is too rosy

Alberta's government has budgeted a $7-billion gap in its finances this year, based on an assumption that the price of West Texas Intermediate — the benchmark type of North American oil — will "average less than $65 US per barrel" through 2015, Premier Jim Prentice said in a speech to the Rotary Club of Edmonton earlier this month.

Given that oil closed below $43 US a barrel yesterday and the year is now almost one-quarter finished, that projection may be a tad optimistic. TD Bank's forecast is much bleaker, expecting an average price of $52 per barrel of WTI this year, rising to $68 next year. 

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If oil prices prove to be lower than the government is forecasting, that $7-billion deficit guess is likely to be on the low side, the bank says.

"The lower price forecast suggests that without any actions, the budget deficit could come in by as much as $1 billion higher than the government’s cited figure for fiscal 2015-16," TD notes.

Problems beyond oil

Even if oil rebounds, the province could still face a structural deficit in the range of $4 billion to $5 billion in a few years, potentially turning it into a have-not province. "Borrowing related to fund[ing] these shortfalls would transform Alberta’s current net asset position into a net debt position by the next fiscal year and rise to as high as seven to eight per cent of GDP by fiscal 2018-19," TD says.

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That's much better than the ratios for many other governments, but still reason for concern to Albertans, the bank says.

Alberta has already floated the idea of cutting five per cent of all spending from its budget, while dipping into its $6-billion contingency fund. That's a pretty deep cut to services, but TD notes that Alberta spends more per capita on services than the national average of provincial governments in Canada does — by as much as $1,300 per person.

But taking a knife to every budget equally isn't the best plan, TD says. "Experience has shown, however, that merely starving departments of funding misses the opportunity of securing longer-term savings."

Don't starve local governments

Infrastructure spending, TD says, should remain a priority, as that's typically an area where government's see good bang for their buck. And the bank urges the province to resist the urge to simply pass the buck on to local governments, the way others have. "Spending cuts must balance short-term fiscal objectives with longer-term sustainability."

TD also says to be wary of asset sales, because too often that just results in a one-time windfall of a "future income stream that would have flowed into government coffers anyway."

On the subject of taxes, the bank notes that thanks to resource royalties, Alberta currently has the lowest tax burden in Canada, and among the lowest in North America. It also famously doesn't have a provincial sales tax, something the government has hinted it has no plans to change. 

Bring in a sales tax?

But that's a mistake, TD says. "By closing the door on the introduction of a PST, the government is missing an opportunity, in our view.

"Budget 2015 will provide a major opportunity to set the province’s finances on a more sustainable path. We hope that the government seizes the moment."