Belt Tightening the Theme of UCP’s First Budget

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Ottawa, October 25, 2019— The Conference Board of Canada’s Senior Economist Daniel Fields offers the following perspectives/insights on Alberta’s 2019 Budget:

In their first budget since being elected in April, the United Conservative Party introduced a cost cutting plan to balance the budget in four years. These stringent spending targets, while not nearly as painful as the cuts in the mid-1990’s, will present a significant challenge as the province faces rising demand from a growing and aging population.

Insights

  • The first Budget (released on October 24th) from the newly elected United Conservative Party set an ambitious goal of balancing the budget by 2022–23 without significant tax increases. To achieve that goal, the government plans to reduce nominal program spending by an average annual rate of 0.7 per cent. This represents a cut of approximately $1.6 billion from current levels by 2022–23.
  • This stringent spending plan will be achieved by freezing its largest expenditure category, health care, for the next four years. Additionally, the government will cut advanced education by 2.5 per cent per year and freeze of all other education spending. This will result in a reduction of total education spending (Alberta’s second largest spending category) by $329 million by 2022–23. Finally, spending outside of the major categories of health care and education will be reduced by an average rate of 1.7 per cent per year.
  • The government will look to achieve these targets through a mix of attrition, job cuts, and wage reductions for public service workers. Additionally, students will see tuitions rise, interest rates on loans increase and tax credits removed.
  • If the government succeeds in limiting program spending, it will be the most significant period of spending restraint seen in the province since the mid- 1990’s.
  • Part of the path to balance also includes a sizeable increase in royalty revenues, which are highly volatile and uncertain. However, the government has included a generous contingency and forecast allowance. This should provide some wiggle room in case revenues come up short or spending targets cannot be met.
  • Overall, Alberta’s revenue growth is expected to average 3.8 per cent per year over the 2019–20 to 2022–23 period. Royalties are projected to grow by nearly 12 per cent over the same period.
  • While, the current deficit is significant at $6.7 billion in 2018–19, the government projects the shortfall will rise to $8.7 billion in 2019–20. This is due to costs associated with cancelled oil-by-rail contracts. Beyond 2019-20, the government expenditure restraint should begin to pay dividends and the deficit is projected to fall. The government expects to balance its books in 2022–23.
  • Net debt is slated to rise to peak at just under $47 billion in 2021–21 before dropping to $46.4 billion in the final year of the forecast. Despite this increase, the province will likely continue to have the lowest net debt as a share of GDP in the country.
  • While the government’s path to balance focuses on spending restraint, taxes remain low in the province. While politically unpopular, especially in the midst of a recession, one alternative would be to consider raising sales taxes which happen to be a very stable source of income. Such a measure would add certainty to revenue projections dominated by large swings in royalties.

Overall, the first budget from the new government was mainly focused on restricting spending to bring the province back to balance. If spending targets are met and volatile royalty revenues fall in line with government expectations, the province should be back in the black by 2022–23.

Daniel Fields

Senior Economist, National Forecast

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