Alberta Budget 2016: Why even US $100 bbl oil is not enough

Since the NDP took office in May 2015, the price of oil has fallen from about US $60 to as low as US $28 this January.

For every US $1 the oil price falls, the provincial government foregoes around CAD $130 million.

Over the past 40 years, resource revenue accounted for between 20 and 50 per cent of total revenue.

In the past fiscal year, resource revenue will account for about six per cent. The nub of the problem is an over-reliance on resource revenue and a high expenditure level.

Since Ralph Klein's government paid off the debt around 2005, the fiscal anchors that mandated balanced budgets were loosened with the result that, even at US $100 per barrel, the government was running deficits.

This forbearance and generosity showed in many areas including: funding of the pension liabilities for teachers; ballooning infrastructure spending; and continually lowering corporate and personal taxes and health care premiums.

From a financial standpoint, the province could still brag about its triple AAA credit rating, low debt-servicing, and a significant, but declining, horde of financial assets.

In the final years of the ancien régime, the government took to obfuscating the financial picture with operating, capital, and savings accounts to mask the province's deteriorating fiscal position. 

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Unfortunately, the economic picture continued to worsen after last May.

Falling oil prices that persist means lower investment, more layoffs, lower demand for services like restaurant meals, falling real estate prices, repossessed cars.

This also means lower revenue from personal and corporate income taxes and fees from motor vehicle registries to land titles. 

Budget 2016 spending

The key message was year-to-year increases in spending were falling over the three year planning period.

Government was "holding the line" on spending increases below the rate of population growth and inflation.

A new line of spending has also been opened up. Starting modestly this year, the "Climate Leadership Plan" budgets $330 million, rising to $2.4 billion in fiscal 2018-19.

This new spending is to be financed principally from the new carbon taxes ramping up in January 2017.

Health consumes 40 per cent of spending and remains the primary source of significant savings, but savings that are politically and administratively difficult to find.

There were few details on the $250 million in-year savings to be achieved.

Much was made of the abolition of 12 government agencies, including such notables as the Disabled Hunter Review Committee.  

But the savings of $33 million over three years pale in comparison to the $6 billion revenue hole from collapsing oil prices.  

Another serious omission was the half page spent on public-sector compensation.

One half of provincial spending is for salaries and benefits of workers.

There was no indication what plan the government proposed to address this controllable portion of government spending as contracts expire with various government unions. 

Some notable spending initiatives included renewable-energy projects to be evaluated by the Alberta Electric System Operator and $45 million on energy-efficiency initiatives.

Another previously announced initiative is the Alberta Child Benefit of $147 million this year which will assist low-income Alberta families.

But overall, there is little adventuresome in this budget in spite of the government's desires to advance a socially progressive agenda.  

They simply do not have the money. Finally, infrastructure spending continues at a very high level.  

The underlying consideration is jobs-construction jobs. The construction companies and unions should be pleased with this policy.

Revenue 

With the exception of non-renewable resource revenue, all other revenue sources hold up quite well. 

Corporate taxes are forecast to fall over the next two years but not materially and personal income taxes are expected to rise modestly over the next three years.  

But corporate income taxes are notoriously volatile because of oil prices so this item is a question mark.

The economic assumptions about oil prices rising to US $64 per barrel over three years, positive and growing interprovincial migration, and retail sales may be a tad bit optimistic.

Investment income, which is also notoriously volatile because it depends on interest rates, exchange rates, and equity markets, depends on factors outside the control of the province.

One positive innovation this year for forecasting is an annual risk adjustment factor of $700 million that will grow to $2 billion in fiscal 2018.  This factor adds greater comfort that the government will achieve its goals. 

Implications

Alberta faces large fiscal imbalances that are going to be financed by borrowing about $16 billion directly and a staggering $20.9 billion in borrowing and refinancing by provincial agencies such as ATB and the Alberta Capital Finance Authority.

While Alberta has considerable capacity to borrow for a number of years, the government and Albertans are going to have to face the music of lower public services or higher taxes or both.