On Wednesday, Alberta’s Finance Minister Joe Ceci presented the government’s latest fiscal update. He does this every three months, and it’s usually a dry affair with a few tweaks here or a revision there. But this time was different.
There was plenty of big news, both good and bad.
Let’s start with the good.
Economy up, deficit down
The government expects Alberta’s economy will grow 4.5 per cent in 2017. This is faster than any other province, and marks the third consecutive increase in growth since last year’s budget. The previous estimate was 4 per cent. The one before that, 3.1 per cent. And the one before that, 2.6 per cent.
And with faster growth comes more jobs and higher incomes.
In 2018, unemployment is expected to be lower than previously thought, averaging 6.8 per cent — down from the previous forecast of 7.6 per cent. And household incomes are rising more quickly than previously forecast.
In short, the recovery is stronger and more robust than most forecasters expected — government and private sector alike. Welcome news to Albertans hard hit by recession.
Alberta’s finances are also improving.
The deficit for 2017-18 is expected to be $9 billion, instead of the $10.5 billion that was previously expected. The improvement largely stems from higher than expected royalties, at $4.5 billion this fiscal year (that’s the highest level since 2014-15), and higher investment income thanks to a strong stock market last year.
These gains, and others, more than offset slightly lower than expected income tax revenue. But there was plenty of bad news to offset the good.
The cost of pipeline constraints
While global oil prices are up, this only modestly benefited Alberta.
A barrel of West Texas Intermediate (a common North American oil benchmark) is currently more than $60 US per barrel. That’s higher than this time last year, and double where it was two years ago.
But a barrel of Western Canadian Select — an important benchmark in Alberta — is now at $36 US per barrel, which is actually lower than one year ago.
Alberta is landlocked, so many producers here receive a discounted price. And with export pipelines full, and more producers turning to rail, this discount has grown — a lot. In November of last year, the differential averaged roughly $14 US/bbl. Right now, it’s about $25, (although it had exceeded $30 earlier this month).
This matters for industry. And for Alberta.
The latest data from Statistics Canada, released only hours before the Finance Minister’s update, shows investment levels in Alberta are expected to decline in 2018, for the fourth consecutive year. Compared to 2014, investment is down $35 billion (61 per cent), most of which is due to the declining in oil and gas activity.
Going forward, the government estimates the high differential due to pipeline constraints could cost Alberta $10 billion over the next five years in foregone oil and gas investment.
The high differential also costs Albertans. In the update, we found out how much.
In 2017-18 alone, pipeline constraints and a larger than necessary discount cost the government roughly $500 million. And, between now and 2022, the absence of new pipelines could cost an estimated $9 billion in foregone royalties.
That’s an average of $1.8 billion — or more than $400 per Albertan — per year.
Let that sink in.
Absent rising royalties, there are only difficult choices ahead.
A large deficit
The $9-billion deficit, while an improvement, is still 2.7 per cent of Alberta’s GDP — making it the largest deficit in Canada and the second largest in Alberta in 25 years, the largest being last year.
It’s also a worse budget-balance than roughly 80 per cent of every provincial or federal budget since 1980. How the government will address the fiscal challenge remains to be seen.
The minister reiterated the government’s goal of balancing by 2023-2024. But it is unclear how they plan to do that. Will spending growth be restrained? Will new revenue sources be found?
With the full budget out in three short weeks, we won’t have to wait long to find out.