Posted on March 12, 2015

Alberta’s Woes Are Contagious

The Alberta budget will be brought down on March 26. Alberta’s coveted triple-A credit rating hinges on how long oil prices remain low and the actions taken in the coming budget to cushion the blow and reduce Alberta’s reliance on oil-related revenues.

Neighboring British Columbia enjoys a stronger budgetary outlook, although not without a prior sustained period of painful adjustment. BC’s economy, however, is more diversified than Alberta’s. A fundamental that cannot be addressed quickly.

The Alberta legislature, earlier this year, implemented a 5-percent pay cut for MLAs. Premier Jim Prentice imposed a similar cut for his Cabinet and senior staff making more than $100,000 a year. This is likely a precursor to a push to renegotiate salaries for public sector workers, which will be hugely unpopular, as we saw in Wisconsin when Governor Scott Walker introduced such measures.

Alberta has no provincial sales tax, an obvious option. But a retail sales tax is the third rail of Alberta politics, the one subject that no one will touch. Given that an election might well be called prior to the scheduled period in 2016, sales taxes are off the table and so are increases in corporate taxes or oil royalties. Albertans, however, don’t like deficit spending either, so significant spending cuts and other tax increases are likely.

When oil prices dropped in the late ‘90s and budget deficits ensued, the government of Ralph Klein cut spending drastically which eliminated the shortfall but had significant fallout for years after. A mix of spending cuts and tax increases is the most likely outcome.

One issue that seems to have been missed in all of this is the impact of the Alberta slowdown on the fiscal well-being of all the provinces. Certainly, the drop in oil prices has been bad for Saskatchewan and Newfoundland as well, even though fossil fuels don’t loom as large in either province. But importantly,Alberta’s troubles spell reduced equalization payments for all of the ‘have not’ provinces—a factor that will hurt the six provinces that received them in 2013-14. Alberta, to date, has been the only province to have never received equalization payments. The formula to calculate such payments is complex, but suffice it to say that the slowdown in Alberta will reduce the national average per capita revenue yield—the measure used in making this calculation– and, therefore, the dispersion of the provincial numbers around the national average will decline. This will lower the transfers to all have-not provinces, which last year included Quebec, Ontario, Manitoba, New Brunswick, Nova Scotia and Prince Edward Island. This is money that can be used at the discretion of the provincial governments. Its reduction will be painful, especially for Ontario, which is confronted with mounting red ink.