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The Quick Take: March 26, 2018

Alberta Reveals its Six-Year Plan to Balance

Daniel Fields
Economist
National Forecast

“Alberta’s 2018 Budget projects a deficit of $8.8 billion for 2018–19 and outlines a plan to balance its books by 2023–24. The budget relies on a hopeful rebound in oil royalties as well as a fair degree of spending restraint—the most seen since the early 1990’s—to balance its books.”

The latest Alberta Budget (released on March 22) attempted to balance the demands for additional spending against the need for fiscal restraint. However, the government may, instead, find it upset people on both sides of the political spectrum with not enough spending increases for some and not enough spending restraint for others.

In an attempt to appease its creditors, the Alberta government outlined a plan to balance its books by 2023–24 by limiting spending growth to an average annual pace of 1.96 per cent from 2017–18 levels. However, the plan’s success also depends on the assumption that oil royalties will rise to over three times their 2016–17 level.

If the government succeeds in limiting program spending, it will be the most significant period of spending restraint seen in the province since the early 1990’s.

Overall, Alberta’s revenue growth is expected to average 6.0 per cent per year over the 2018–19 to 2023–24 period. Royalties are projected to grow by nearly 15 per cent over the same period.

Oil revenues are an inherently volatile form of revenue and may underperform. While the government has included a contingency until 2020–21, they have not done this for the final three years of the projection—likely the riskiest portion of the royalty revenue forecast.

Despite indicating plans to diversify its revenues away from royalties, the forecast relies heavily upon the growth in oil revenues. With that said, royalties are expected to make up just 16 per cent of total revenues by 2023–24, which is a far cry from the nearly 25 per cent averaged over the past twenty years.

While politically unpopular, especially prior to a 2019 election, the province could use a more stable source of income such as a retail sales tax, to add some certainty to their revenue projections.

In the absence of a sales tax, the province expects to use the federal mandated increase of its carbon tax revenues to help fund general government spending starting in 2021 (once the higher federally mandated carbon tax comes into effect). This is unlike the current structure which puts carbon tax revenues back into environmental programs.

After posting a deficit of $9.1 billion in 2017–18, Alberta is projecting its shortfall will shrink to $8.8 billion in 2018–19.

Net debt is slated to rise to $56 billion by 2023–24, more than doubling its current level of just under $21 billion. With that said, the province will likely continue to have the lowest net debt as a share of GDP in the country.

Overall, this budget relies on a robust rebound in oil royalties and a fair degree of spending restraint in order to balance its books. While doable, without a significant contingency, this difficult task may be a risky endeavor.

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