Alberta budget 2018: Where does it leave us?
Albertans should worry about rising interest payments on debt leading to wealth channelled outside province
There were at least three narratives dominating public discussions leading into Thursday's provincial budget.
First, Premier Rachel Notley several months ago foreshadowed a budget with "compassionate cuts."
Second, in recent days Finance Minister Joe Ceci clarified that his budget forecasts would be based on the assumption of the Trans Mountain pipeline proceeding.
Third, the minister stressed there would be a blueprint to a balanced budget by 2023-24.
Underlying the budget strategy is the electoral reality that there are only about 12 months before an election writ will be issued.
This adds pressure for a government desperately seeking a return to robust economic growth and consumer and business optimism as the calendar turns over into 2019.
Themes and pillars
In Ceci's fourth budget entitled "A recovery built to last," three themes or pillars guiding fiscal strategy are laid out.
The first pillar is a path to budgetary balance, an end to deficits. The government lauds its own spending control efforts while chastising the boom spending of its predecessors. The main elements of this path include preserving Alberta's low tax advantage; eliminating waste and finding efficiencies; imposing austerity on executives; and reducing capital spending.
This addresses matters directly under the government's control.
The second theme centres around government efforts to spur on investment, to diversify the economy and create good, long-term jobs.
The final pillar is to protect public services and support Albertans. This theme is at the core of the NDP government's DNA. Here one finds a listing of current and new initiatives, including the announced fight against rural crime.
Predictably, business associations were critical of the government's failure to address spending.
The common complaint was uncalled for increases while Alberta spending levels are already regarded as too generous.
While the Notley government has managed to limit salary increases to essentially zero, some business advocates say most public servants in collective agreements will still collect "grid increments."
The burgeoning debt and lack of a credible plan to reach a budget surplus were oft-repeated themes
Institutional recipients of government spending (school boards, municipalities and universities) were generally supportive.
The opposition parties were more cutting in their opinions, generally citing a lack of vision, imagination, competence and courage to take the necessary steps. United Conservative Party official Opposition leader Jason Kenney targeted the vast debt accumulation and resulting debt service payments as harming the interests of ordinary taxpaying Albertans.
Path to balance
When examining the credibility of the balanced budget plan, it is necessary to look at the assumptions used.
A fiscal plan must be credible since all economic decision-makers are affected.
For example, parents intending to send their children to post-secondary institutions make financial plans on the future affordability of a university education. Hospital administrators, in order to plan ongoing and new services, need to expect that targeted levels of spending will be forthcoming. Businesses in transport assume that roads will be maintained, and investors buying the province's bonds must have some assurance that a 10-year bond will be repaid on maturity.
In building a credible plan, it must be remembered that the further out a fiscal forecast goes, the more remote from reality these numbers become.
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The 2016 Fort McMurray fire could not have been predicted, and who knows what future disasters await? For Alberta, the most critical assumption remains the prices for oil and natural gas. For the budget to balance, resource revenue and tax revenue will have to grow dramatically.
The balanced budget plan shows that the significant movement to balance does not occur until the last three years, the very years that the government has the least control over.
And while criticizing their predecessors mishandling of the boom-and-bust economy, the very premise of the NDP balanced budget plan is predicated on the completion of pipelines and reliance on energy that the government says it is worried about.
Other factors outside the province's control include rising interest rates, which could impact the bottom line negatively by $226 million per year for each one per cent rise in rates above the assumptions.
While the oil and gas industry are predicting continued global gains in oil consumption over the next few years, that still implies Alberta's hard-to-produce bitumen can be exported.
For a financial plan to be credible it must make conservative assumptions about the future.
For example, the Alberta government trumpets its tax advantage. In theory, the province has enormous unused fiscal capacity to raise taxes and still remain the lowest tax jurisdiction in Canada.
But for there to be credibility, the capacity to use this "advantage" cannot be in doubt. Unfortunately, in the minds of credit rating agencies the capacity is in doubt because successive governments have refused to use this so-called advantage.
The NDP plan to build $96 billion in debt by 2024 sounds like a lot, but is it? Should Albertans be worried?
Debt must be serviced and paid back, or re-financed, out of the general resources of the government, which ultimately means out of the economy. It is true that Alberta's debt is still relatively small compared to its economy. But the growth in debt — leading to interest costs climbing to an estimated $3.7 billion annually in the final year of the balanced budget — plan are alarming.
However, it is the volatility of Alberta's revenue base reliance on investment and non-renewable resources that credit rating agencies are concerned with.
Albertans should also be worried that growing interest payments on debt will leave the province with monies flowing to Toronto and foreign financial centres rather than staying in the province. Ultimately it will be the resources of Alberta's economy, residents and businesses that will be appropriated by government to service the debt, and maybe ultimately retire the debt.
Sooner or later, future residents and businesses will be called on to address the rising debt issue. While inflation may help erode the real value of the final payment, the hope for future reliance on oil and gas to foot the bills may not materialize.
This could leave fewer, less wealthy taxpayers to repay debt incurred by earlier generations.
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