Balancing Alberta’s budget by 2022 will be an uphill battle for UCP government

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Balancing Alberta’s budget by 2022 is going to be increasingly challenging for Premier Jason Kenney’s government as the province’s already weak economy is growing more slowly than expected amid falling oil prices.

In the four months since Finance Minister Travis Toews tabled the United Conservative Party government’s first budget, projections for Alberta’s economic growth have been slashed owing to persistently weak oil prices, trade uncertainty around the world and disruptions caused by the coronavirus outbreak. The provincial economy may have also dipped into recession in 2019.

The government’s updated assumptions about economic growth and oil prices will be central when Mr. Toews tables his second budget on Thursday. Balancing the province’s books by 2022-23 was a key UCP promise in the election campaign last year that brought the party to power. According to Mr. Toews’s first spending plan in October, quickly turning around the $8.7-billion deficit projected for 2019-2020 will rely on small spending cuts, a quickly rebounding economy and increasing oil prices.

Last October’s budget had expected the economy to grow by 2.7 per cent this year, with oil prices averaging US$58 a barrel. The latest outlook from the government-owned bank, the Alberta Treasury Branches, expects growth of only 0.9 per cent this year. The price for West Texas Intermediate hovered around US$49 this week. The provincial treasury loses $310-million in annual revenue for every dollar oil prices are below its projection.

The difference in only a few months between the government’s late 2019 projections and private-sector forecasts from the past few weeks could shave up to $3-billion from annual revenue, said Trevor Tombe, an economics professor at the University of Calgary.

“We’re going to see a reduction in anticipated growth, a reduction in employment, a reduction in oil price forecasts,” he said of the coming 2020-21 budget.

“That’ll be a real challenge for the government to manage, while maintaining their commitment to balancing the budget by 2022.”

The Alberta government’s finances are among the most volatile in Canada, with the oil sands sending a stream of money to the treasury from royalties and corporate taxes that increases and dips based on global prices. Dr. Tombe said the province’s actual revenue has on average been 10 per cent higher or lower than forecast in every budget over the past two decades.

The Finance Minister acknowledges the challenges but said the province remains on track to balance the books by 2022.

“There continues to be heavy lifting in front of us as a province. But I will say this: we are on track,” Mr. Toews said Wednesday. “What we see today out there in the global economy represents the volatility risk that we have in Alberta,” he added. “It just further reinforces the rationale to manage and control what we can control.”

The Conference Board of Canada expects Alberta’s economy to expand by 2.2 per cent this year, following a 0.2-per-cent contraction in 2019. The provincial economy fell into a deep recession in 2015, following a sharp drop in oil prices that began in the final months of 2014. The economy has yet to fully recover.

“After years of declining energy investment, we are nowhere near where we were in 2014, but we bottomed out in 2019 and now we’re seeing growth in 2020. That’s relatively good news,” said Matthew Stewart, the director of economic forecasting for the Conference Board.

Despite the economic slowdown in recent years, oil production is still increasing and hitting record levels, helping drive a rebound in 2020, Mr. Stewart said. Growth would pick up further if the risks around coronavirus eased, he added.

The government will need to look for more cuts if it wants to balance the budget by 2022, Dr. Tombe said. A futures contract for a barrel of oil in December, 2022, was selling for $49.64 this week – proof, he said, that there’s no quick fix for the problems facing the province’s largest industry. Coronavirus has made that worse.

“Coronavirus has pretty much shut-in the world’s second-largest economy [China]. It has shaved off economic growth in Alberta and dramatically cut Chinese demand for oil,” Dr. Tombe said. The latest figures show demand has fallen by about three million barrels a day in China, about 20 per cent of the country’s daily use before the virus hit.

Instead of forecasting more cuts, the government’s Throne Speech on Tuesday indicated that the Kenney government could increase spending in the budget, including direct investment in the oil industry, to help create more jobs.

NDP finance critic Shannon Phillips warned that decreased revenues could force the government to cut deeper into things such as health and education, even as it continues with corporate tax cuts. "I’m expecting to see a plan, unless they actually change direction, that blows a hole in the budget,'' she said.

Lori Williams, who teaches political science at Calgary’s Mount Royal University, said the government could drop its commitment to balancing the books by 2022 in order to increase spending. The Throne Speech made no mention of the 2022 pledge, but instead promised that health and education funding would be increased to record levels.

“They are really trying to walk a fine line here, but what’s clear from the Throne Speech is that they raised expectations in the election very high. They anticipated the corporate-tax cuts would stimulate the economy, that didn’t happen, and now they are looking at investing in the economy directly,” she said.

“The reality is that if the economy is bad he’ll have a hard time winning re-election.”

With reports from The Canadian Press