Iris Evans releases the second quarter fiscal update for 2009-10 in Calgary on Thursday. (CBC)

Alberta is thanking a recovering economy and higher oil revenues for reducing its anticipated deficit this year to $4.3 billion.

Finance Minister Iris Evans announced the improved outlook for the 2009-10 fiscal year during a quarterly update in Calgary on Thursday morning.

When the budget was presented in April, the deficit was forecast at $4.7 billion for the year ending next March 31. By the first quarterly update in August, the anticipated shortfall had grown to $6.9 billion.

Evans credits the smaller deficit to higher oil, investment and corporate tax revenues, and government ministries finding $430 million in cost savings.

Despite the expectation of a lower $4.3 billion deficit, the government will go ahead with $2 billion in spending cuts to ensure Alberta returns to budget surpluses by 2012-13, Evans said.

"It's a good news story, but a deficit is still a deficit," she said. "The eye on the prize that the premier [Ed Stelmach] has had is that we would make sure that we reduced our spending. And that's clearly what we aim to do through the weeks and months ahead."

Alberta spending up

Spending is now forecast at $37 billion — up $575 million — due to fighting forest fires and the mountain pine beetle, agriculture disaster assistance, and more people needing income support and health benefit assistance.

Alberta is counting on oil prices at $67.51 US a barrel, up about $12 from its budget forecast, but the province is less optimistic about natural gas prices. The budget used a price of $5.50 per gigajoule in its projections. It now sits at $3.25 per gigajoule. (A gigajoule is a metric measurement of energy use. It is equivalent to the energy provided by 26.1 cubic metres of natural gas.)

The province intends to cover the deficit by dipping into its $17-billion Sustainability Fund, created to protect the government from unexpected revenue drops and emergencies.

"I find so frequently that people haven't really grasped the difference between the deficit when you are borrowing essentially from your emergency savings and when you have to go and pay interest rates at the bank to borrow money from other sources," Evans said. "So we are in an advantage."

The Alberta Heritage Savings Trust Fund, a combination of bonds, stocks and real estate, made some gains as stock markets recovered and is currently valued at about $14.5 billion. Much of the earnings from the fund are transferred to the province's operating budget.

'Deficit still gigantic'

Opposition polticians had little praise for the improved forecast.

Liberal Leader David Swann said he would like to see cuts to travel spending, an end to achievement bonuses for government bureaucrats, fewer ministries, and a smaller cabinet.

"The Stelmach administration has made no real progress toward reining in wasteful spending. The deficit is still gigantic and the premier and ministers are still relying on wishful thinking and a miracle – [an] unlikely spike in natural gas prices to dig us out of the hole. That's no way to run a province," he said.

NDP Leader Brian Mason said Alberta is giving subsidies to large oil and gas companies instead of spending money on core services such as health care.

"I think people are already noticing [the cuts] in a significant way and a further cut of $2 billion to the provincial budget will be massive cuts and very harmful to people," he said.