Tough road ahead for Alberta
March 2, 2020
Focus Areas—Canadian Economics
The Conference Board of Canada’s Senior Economists Daniel Fields and Sam Goucher offer the following insights on Alberta’s 2020 Budget:
“The UCP is sticking with their stringent spending plan that was first introduced in their inaugural budget last fall. Since then however, oil prices have dropped, and subsequently revenue growth is expected to be weaker. In order to meet the balance target of 2022-23 something had to give, either higher taxes, increased cuts on a lapse in the deficit target. In this case, the government chose to further cut spending in order to stick to its balance budget target”
- The second Budget (released on February 27th) from the recently elected United Conservative Party (UCP) continued the government’s plan to balance the budget by 2022-23 without significant tax increases.
- Budget 2020 will keep the government on the path that began with last year’s budget. Achieving balance through a combination of spending cuts and a reliance on royalty revenues.
- The government’s spending plan will be extremely challenging to achieve. It includes a freeze in its largest expenditure category, healthcare, for the next three years. Additionally, the government plans to cut advanced education by 3 per cent per year and freeze all other education spending. This will result in a reduction of total education spending (Alberta’s second largest spending category) by $509 million by 2022-23. Finally, spending outside of the major categories of health care and education will be reduced by an average rate of 1.1 per cent per year (once we take account for the one-time purchase of rail cars).
- The government will look to achieve these targets through a mix of attrition, job cuts, and wage reductions for public service workers.
- If these difficult spending targets can be achieved—which will be the most significant period of spending restraint seen in the province since the mid-1990’s—revenues still need to follow closely to government projections if the province is to balance by 2022-23.
- Budget 2020’s outlook for nominal GDP – the broadest measure for revenue growth – is expected to average 5 per cent over the 2020-23 period. This is well above our current projection of 4.1 per cent over the same period.
- More importantly, Budget 2020 assumes WTI will average $58 per barrel this year, which is optimistic considering how much prices have deteriorated so far since the coronavirus outbreak. Currently the oil price is hovering at about $45 per barrel with little growth expected in the futures market. Using Budget 2020’s sensitivity analysis, if the price of oil averages $50 per barrel for the year this would mean about $2.840 billion less in revenue. Interestingly, there is no forecast allowance for such a scenario until 2022-23 where $450 million is earmarked.
- The reliance on royalty revenues continues to be a high risk surrounding the fiscal outlook. The government is relying on royalties to grow by an average annual pace of nearly 9 per cent over the forecast. If that happens, by 2022-23, royalties will make up nearly 15 per cent of total revenues, the highest share since 2014-15.
- Overall, Alberta’s revenue growth is expected to average 4.5 per cent per year over the 2020-21 to 2022-23 period.
- Despite the weak fiscal position, the government restated its commitment to incrementally lower the corporate tax rate to 8 per cent by 2023. Including last year’s expected recession, businesses endured three economic contractions in the span of five years (2015-19). Six years later, the economy is still below where it was in 2014. Given the ongoing weakness in the economy, the government hopes business owners will use the additional revenue from lower taxes to deleverage debt, expand their operations and hire new staff.
- The government expects net debt to peak at just over $47 billion in 2021-22 before dropping to $46.6 billion in the final year of the forecast. Despite the incredible increase over the last several years – the province was in a net asset position as recently as 2015-16 – 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, a small sales tax can be a stable source of income. Such a measure would add certainty to revenue projections dominated by large swings in royalties.
Overall, the second budget from the new government was mainly focused on continuing the ambitious spending path to bring the province back to balance. Weaker revenue prospects will make this a challenge, but if the province can stick with the spending targets, and oil prices bounce back, Alberta should be in a surplus position by 2022-23.