Alberta still on the resource royalty roller-coaster as economic growth slows
CALGARY — Alberta’s budget update shows a province that has not been able to get off the resource roller-coaster as shrinking deficit figures are largely a result of higher oil royalties, economists say.
Alberta Finance Minister Joe Ceci announced Wednesday that oil prices in the first half of 2018 were “robust” and, as a result, the province has been able to reduce its projected budget deficit for the fiscal year by $1.9 billion to a total of $6.9 billion.
But the deficit is projected to jump to $7.9 billion next year as the province’s economic growth slows to 1.6 per cent in 2019 as a result of a continued lack of pipelines and “tempered” West Texas Intermediate oil prices — two major factors that highlight the province’s continued dependence on the energy sector.
Before Alberta Premier Rachel Notley led the NDP to form government in the 2015 election, she said the province needed to get off the “resource revenue roller-coaster.”
With another Alberta election expected by the end of May, economists say the provincial budget update by Ceci shows the only way the government balances its budget by the end of 2023 is higher resource royalties.
“We are firmly on the royalty roller-coaster despite what the finance minister says,” University of Calgary associate professor of economics Trevor Tombe said of the budget update.
“Our deficit is fully a choice. It’s not something that’s imposed on us by a weaker economy,” Tombe said. He added that if Alberta’s tax structure resembled that of other provinces — if the province depended less on non-renewable resource revenues — it would not face a budget deficit at all.
The province’s path to a balanced budget in 2023, for example, would require non-renewable resource revenues to hit $12.3 billion, which is 132 per cent higher than the $5.3 billion in revenues from the sector forecasted for 2019/2020.
“Each dollar change in the price of oil improves the overall fiscal situation of the province by $265 million per year,” Tombe said.
National Bank Financial analyst Catherin Maltais said in a research note the province’s plan to balance its budget would require new oil export pipelines and “costs containment” on core public services while “maintaining no payroll and sales tax as well as no health care premiums.”
Ceci acknowledged the challenges to the province’s economy but said the government’s attempts to support new export pipeline projects, encourage petrochemical diversification and buy rail cars would help lead to higher economic growth next year.
“Although the economy is growing, the recovery has not reached every kitchen table,” he said.
Alberta’s oil and gas sector contributes 25 per cent of its gross domestic product, according to Pedro Antunes, chief economist at Conference Board of Canada chief economist.
“Often when we hear about Alberta diversifying its economy, it’s really hard to do when you’re earning such a big return from a resource that the province owns,” Antunes said.
The Conference Board released its own forecast Wednesday that showed Alberta’s real GDP growth would amount to just 1.3 per cent in 2019, the lowest growth rate among all provinces, as a result of the province’s decision to curtail oil production and lower energy investment.
The budget update also shows drilling activity in Alberta has fallen since Nov. 2018 after increasing at a seven per cent rate for the preceding 10 months.
The government expects lagging drilling activity would continue for the first half of 2019 until oil-by-rail shipments pick up and Enbridge Inc.’s Line 3 pipeline project begins operating.
Early construction work on both the Trans Mountain pipeline expansion to the West Coast and the Keystone XL pipeline to the U.S. Gulf Coast stalled after court rulings last year overturned approvals.
The stop-work orders on both projects left Alberta in a situation where more oil is produced than can be exported and where large additions to export capacity is years away.
Ceci said he’s currently working on a full budget for 2019 but declined to say if that budget would be tabled before an election is called. As a result, Wednesday’s fiscal update is likely the last official economic update from the province before Albertans vote.
For the first time ever, the province included documents in the fiscal update called the “Path to Balance” that details how “amid extreme volatility, this government in the last three years has provided core public services, including health care, education and social services.”
Ceci said he asked the province’s Treasury Board and Finance department to include the document in the budget update, but insisted it wasn’t a political document.
The NDP’s opponents did not see it that way.
“The NDP’s vague ‘path to balance’ promises mean little. Over the last four years, the NDP promised four different dates for a supposed return to balance,” United Conservative Party MLA Drew Barnes said in a statement. The UCP is currently leading in the polls.
Barnes said the government’s budget shows Albertans are spending $5 million in interest payments on the province’s debt “today alone.”