Posted on October 27, 2015

Enormous Challenges for the Alberta Budget

With the Alberta economy hitting the skids, the Notley government faced conflicting goals–diversifying away from the hard-hit oil sector, stimulating the economy and putting the province back on a path to a balanced budget. In June, the government introduced legislation to increase spending for health care, education and social services. It increased the provincial income tax for higher-income families and hiked the corporate tax rate from 10 to 12%.

Even with these tax hikes, Alberta will still maintain the lowest overall tax regime in Canada, with no sales tax, no payroll tax, no health care premiums and the lowest provincial taxes on gasoline and diesel.

With the decline in oil prices, the Alberta economy has moved into recession, taking the budget from a surplus of $1.1 billion last fiscal year to a deficit of $6.1 billion in FY2015-16. The province is forecasting a return to surplus at the end of this decade or sooner if the economy rebounds quicker.

Fiscal stimulus will come in the form of increased capital spending for infrastructure programs, similar to the prescription of the newly elected Trudeau government. They are also introducing business incentives to create new full-time jobs and greater availability of capital for business through a new government funding facility. Diversification and new business activity will also be encouraged by the creation of a new Ministry of Economic Development and Trade.

On the austerity side, Alberta is following in the footsteps of Ontario in stabilizing funding for key public services and limiting the growth in overall spending. As well, there are a number of new revenue initiatives such as increased tobacco and liquor taxes.

The budget balance by 2019-20 is predicated on the assumption that oil prices will rise gradually to $68US/bbl in FY 2017/18–just about about 50% higher than they are today.

Alberta’s NDP government will forge ahead building schools and hospitals and hiring more teachers and nurses, but the devastating impact of low oil prices has it planning to borrow money just to keep the lights on.

Much of the spending is being underwritten by record debt, which is pegged to reach $36.6 billion by 2018 — nearly 15 years after former premier Ralph Klein announced the province had fully paid off what it owed. Longer term forecasts have debt reaching more than $47 billion by 2020. Starting next year, the province plans to borrow money to pay not just for capital projects, as it has in the past, but for day-to-day programs as well.

To prevent debt from taking over, the government introduced new legislation to cap borrowing. It would limit government debt to 15 per cent of nominal gross domestic product, which is GDP not adjusted for inflation.

Bottom Line: Alberta is faced with the conundrum facing many countries in the European Union as well as Ontario–austerity vs stimulus in the face of economic weakness and burgeoning red ink. The NDP government has chosen to take a middle-of-the-road approach, boosting spending on infrastructure and job support, increasing some social spending and raising taxes and fees moderately while putting a lid on future spending. The big hope is that the global economy will improve meaningfully enough to increase oil prices. As well, the government will do whatever it can to attract and support new business and innovation in the hard-hit province.