Calgary·Analysis

Alberta spends and N.L. taxes, on different paths after oil price crunch

They say timing is everything. Alberta Premier Rachel Notley should probably send a thank-you card to Newfoundland and Labrador Premier Dwight Ball for tabling his province's budget on the same day as Alberta's.

Out of necessity, Alberta and Newfoundland and Labrador take different approaches to their fiscal woes

Alberta and N.L. budgets

The Exchange

5 years ago
11:25
The Exchange hosts a panel of economists to give us their insights into both provinces' budgets 11:25

They say timing is everything. Alberta Finance Minister Joe Ceci should send a thank-you card to Cathy Bennett, his counterpart in Newfoundland and Labrador, for tabling her provincial budget the same day as Alberta's.

The Newfoundland and Labrador budget captured the country's attention with its tax and fee hikes and a provincial debt that will jump to nearly 50 per cent of GDP within a year.

It provided an interesting contrast to Alberta's budget, which offered up new money for families, for low-income Albertans, for small business and for investors. It didn't introduce new taxes and offered subsidies for the carbon tax that will come into effect in 2017. All while running a deficit this year that is big, $10.4 billion, but smaller per capita than Newfoundland and Labrador's forecast deficit of $1.83 billion.

In short, Newfoundland and Labrador made Alberta look good. Well, maybe not good, but OK.

At least on the surface.

Drill down a little bit and it becomes clear that the two provinces are looking to solve their oil-royalty addiction differently.

"Newfoundland's interpretation of the fall in the oil price is that oil is not going to come back any time soon," said Ron Kneebone, an economist with the School of Public Policy at the University of Calgary.

"So rather than accumulate a whole bunch of debt, waiting, hoping, praying that oil prices will come back, they decided to take action to close the deficit. Alberta seems to be deciding to do the opposite."

Getting off the royalty roller-coaster

The oil price shock was a theme in both budgets. When oil prices were high two years ago, Newfoundland and Labrador earned nearly a third of its revenue from energy royalties, Alberta's number was just above 20 per cent.

The drop in oil prices was disastrous for both provinces' budgets, but it's not fair to call it a shock, said Tim Pickering of Calgary's Auspice Capital.

"We've been through this many times," said Pickering. "And we're going to go through it many more times, because as the marginal barrel in North America, we swing high and we swing low. So this oil price shock was not a shock. We should have prepared for it. That is not the NDP's fault. But what I didn't hear is how are we going to prevent that in the future."
Alberta expects its energy royalties to more than triple in the next three years. (Alberta Treasury)

Pickering thinks the solution is to hedge, or lock in a price for oil on the futures market, while others suggest spending cuts and a sales tax.

Newfoundland and Labrador took the route of higher taxes and restrained spending. The province is trying to shift its revenue away from a dependence on energy royalties by increasing the tax burden on its citizens.

Alberta is not.

As Ceci said in his budget speech, Alberta has no sales tax, no health-care premium and, overall, the lowest tax regime in the country.

Economist Trevor Tombe has pointed out that Alberta could solve most of its deficit problem simply by adopting the tax regime of the province next door, British Columbia. It has chosen not to do that.

That raises the question of what happens the next time oil crashes.

"I think that any government in this situation has to recognize that the reason for their deficit is the fall in oil prices," said Kneebone.

"And then you have to decide: Are oil prices going to come back any time soon? It's a very high risk budgeting strategy to just hope that they do, and do nothing in between."

Debt to GDP across Canada, as of 2014-15 (Alberta Treasury)

Alberta has more options than N.L.

Alberta is spending its way through the downturn because it has the option to do so. It came into the oil price downturn with little debt and a positive net worth. That changed in the last fiscal year, but the province still has very low debt relative to other provinces and the country as a whole.

"So there's a lot more flexibility there to run with a stimulus program, to offset some of the weakness in the economy," said Robert Kavcic, a senior economist with BMO Capital Markets.

Kavcic said that Newfoundland and Labrador realized that it was heading into troubled waters, specifically that it might not have the credit rating to easily borrow to fund its deficit.

"They would have a really hard time going out on the road and selling bonds to investors without something like this to show."

An economic experiment

Alberta's goal, of course, is to spend its way back to economic growth. Newfoundland and Labrador doesn't have that choice. As time marches on and oil begins its slow creep upward, it will be interesting to watch how the two economies react.

Alberta tends to have strong economic growth, in general, but is also pushing billions into the economy, as Newfoundland and Labrador pulls money out through higher taxes and less spending.

"You'll see a pretty sizable gap open up, as oil prices go up over the next two years."

That is certainly the hope in the West. Alberta is now set to run a deficit for a total of 10 years, though, at which point it will be carrying $57.6 billion in debt. At that point, the province is clearly hoping it will be riding up on that oil price roller-coaster, not down.

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