Alberta's fiscal update: Difficult choices ahead

“Many were expecting the worst, and they weren't disappointed.” Calgary economist Trevor Tombe digs into Alberta's latest budget update. He says while there is no need to panic, there are serious conversations to be had, and difficult choices to face.

'If any province is capable of absorbing such a massive shock, Alberta is'

Oil prices have plummeted over recent months, leaving Alberta in a precarious position. (Associated Press)

Governments all over Canada are revising their budget numbers.

On Monday, the federal government updated its budget projections, and now expects an $18.4-billion deficit next year. Now it's Alberta's turn.

Many were expecting the worst, and they weren't disappointed.

The deficits will be larger than expected, especially next year. There is also no clear plan on how to improve Alberta's finances.

Let's see the specifics.

It isn't good

Finance Minister Joe Ceci announced this year's deficit would be $6.3 billion. That's up $200 million from the October budget projection.

Finance Minister Joe Ceci announced Wednesday the province's deficit projections could climb as high as $10.4 billion when its 2016-17 budget is tabled in the spring. ( (Amber Bracken/Canadian Press)

While only a modest increase, it masks some large changes happening behind the scenes.

In particular, revenues fell — a lot.

Personal income taxes are down over $760 million and natural resource revenues are down nearly $300 million. Offsetting this were some reductions in total spending, mainly lower than expected disaster-related and infrastructure spending and lower pension liabilities.

Interestingly, the opposition Wildrose Party pointed to another deficit number, which showed a $9 billion shortfall. Both deficit numbers are correct, though they measure different things.

Interestingly, the opposition Wildrose Party pointed to another deficit number, which showed a $9-billion shortfall. (Colin Hall/CBC)

One measure spreads infrastructure spending over time while the other records the costs up front.

Either way, Alberta's fiscal situation isn't good.

While Albertans should be concerned, there is no need to panic. Alberta started into this difficult period with the strongest fiscal situation of any province.

Currently, the province has financial assets (investments, cash, etc.) that exceed the total amount of its debt — about $4 billion more, to be precise. This is unlike any other province, where financial assets are typically far, far smaller than total debt.

There's time to correct course

If any province is capable of absorbing such a massive shock, Alberta is. Simply put: the fiscal sky in Alberta is not falling, and there is time to correct our course.

Even with these revised numbers, it looks like Alberta's net-debt situation will be within four to five per cent of GDP by 2018. This is better than any other province — B.C., for example, has a net-debt position currently over 16 per cent of its GDP.

The key issue is the expected path of future deficits.

Recent credit downgrades and warnings by ratings agencies warned Alberta specifically that, despite the province's strong fiscal capacity, there is no credible plan to tackle deficit.

That's a serious problem, and it's not getting any easier.

Since the last provincial budget in October 2015, oil prices have continued to fall. The government was expecting $61 oil for 2016-17, but a safer bet now is closer to $40.

Oil prices are not expected to recover until at least 2017. (Akos Stiller/Bloomberg)

This affects not only royalty revenues, but also corporate and personal income taxes.

Corporate profits are expected to shrink by over 17 per cent in 2016, and household income will likely fall by one per cent. Overall, the government estimates the economy contracted by 1.5 per cent over 2015, and will fall a further 1.1 per cent in 2016. This is a sharp reduction from what the government was forecasting in last October's budget.

This will all affect the government's bottom line.

The near term

When asked directly about how big next year's deficit will be, Minister Ceci said it will be "a lot; a hell of a lot." Specifically, he pinned it at "$5 billion more than we previously forecast."

Though he didn't say it out loud, that's $10.4 billion.

To put this in context, that will be about 3.25 per cent of Alberta's economy. The largest since Premier Don Getty was in office, and worse than 90 per cent of all provincial and federal government budgets in Canada since 1980.

Home sales are expected to be even slower in 2016 than 2015, according to the Calgary Real Estate Board. (AFP/Getty Images)

And what's the government's plan? Unfortunately, today's forecast did not present estimates for future years. We will have to wait for an upcoming full budget for those.

In the new conference though, the minister firmly committed to no new taxes, and the government isn't likely to lower spending. They are committed to "bending the curve" on health care spending costs (and rightly so), but that is a longer-term process. Instead, we appear on course to simply wait for higher oil prices.

This may work out, but it's risky.

The long term

If oil prices do not rise then deficits will continue to mount. Future credit downgrades and rising borrowing costs will follow, and it will only become progressively more difficult to get the budget back on track.

Chevron Canada is just one of many companies in the oil and gas industry reducing its workforce. (Google Maps)

The government, opposition parties, and indeed all Albertans must start to have serious conversations about the difficult choices we face. The deficit is a policy choice, and Alberta can balance its budget, gradually, anytime it wants.

The critical question is: How?

Should revenue go up? If so, how much and through what taxes? Should spending go down? If so, in which departments and how much? Perhaps an HST should be on the table. Perhaps public sector salaries should be frozen. Perhaps the government should appoint an advisory panel to look into the options.

There are no easy answers, but serious and responsible discussions are sorely needed.

CBC Calgary's special focus on life in our city during the downturn. A look at Calgary's culture, identity and what it means to be Calgarian. Read more stories from the series at Calgary at a Crossroads.


Trevor Tombe is an associate professor of economics at the University of Calgary and a research fellow at The School of Public Policy.


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