Alberta Minister of Finance Travis Toews delivers the 2021 budget in Edmonton on Feb. 25, 2021.JASON FRANSON/The Canadian Press
Alberta’s politicians return to the legislature Tuesday and the governing United Conservative Party will present its budget on Thursday. Despite two years of the coronavirus pandemic, the 2022-23 budget will be defined by the price of oil, which, in Alberta, constitutes a return to normal.
The budget will also be shaped by the political calendar: Premier Jason Kenney faces a leadership review in April and Albertans vote in a general election next year. Residents of all stripes are angry at him – over COVID-19, coal mining in the mountains, the draft school curriculum, to name a few – and an attractive budget could make some of them forget why they are mad at him.
Here is what to watch for when Alberta presents its 2022-23 fiscal plan.
Oil, oil, oil
Generations of politicians in Alberta have pledged to get off the energy roller coaster, all without success. Right now, Alberta is enjoying the ride.
A year ago, Alberta’s budget was built on the assumption West Texas Intermediate oil would trade at an average of US$46 a barrel in fiscal 2021-22; US$55 a barrel in 2022-23; and US$56.50 a barrel the year after that. WTI, however, last traded below US$60 a barrel on April 12, 2021, according to the U.S. Energy Information Administration. Oil is now trading above US$90 a barrel.
As prices held strong, Alberta’s production increased. The province produced a record 1.31 billion barrels of oil in 2021, according to data from the Alberta Energy Regulator. Monthly production peaked in October, at 3.84 million barrels a day.
Alberta, in turn, should be flush with royalty revenue. And that creates some political conundrums.
The Bottom Line
Experts predict Finance Minister Trevor Toews and Mr. Kenney will, in the worst-case scenario, produce a budget that is almost balanced. Mr. Kenney staked his reputation on whipping the budget back into shape and the juicy oil prices will get him there.
Trevor Tombe, an economics professor at the University of Calgary, calculated Alberta needs oil to trade at US$71 a barrel to balance its budget.
“The price of oil is so much higher than what is needed to balance,” he said. “Having a surplus will be difficult for the government to avoid.”
Alberta has not posted a surplus budget since 2014, and it was in the red in the years after the 2008 financial crisis.
A balanced budget would have nothing to do with economic savvy, according to Lindsay Tedds, an economics professor at the U of C.
“The budget has balanced itself,” she said. “This is Alberta’s budget history.”
Expenses
Mr. Kenney and his fellow budget hawks have been adamant that Alberta has a spending problem, not a revenue problem.
Dr. Tombe predicts Alberta’s expenses per capita could, for the first time in generations, drop to the same level as those in British Columbia, Ontario and Quebec. (This excludes expenses tied to the coronavirus.) Matching expenses per capita would give the UCP an opportunity to argue its spending restraint has been justified, Dr. Tombe said.
This puts UCP in a tricky spot.
“The spending problem appears to now be solved. At least how the government has framed it,” he said. And so if there is no longer a gap between expenses and revenue, future budgetary challenges will have to be addressed by changes on the revenue side of the ledger.
The government could, correctly, note the budget is healthy because oil prices are rallying. But Dr. Tombe does not expect Mr. Kenney will draw attention to the energy roller coaster in the name of greater restraint.
“That would require the government to be quite open about the fact that much of the improvement we’re seeing is not due to policy choices,” he said. “They will want to make it seem as though it is because of their effort.”
Revenue
If expenses are in check and Alberta’s financial health remains at the whim of the oil market, that leaves taxes, fees and royalties.
“We’re at a fiscal reckoning where we need to get our revenue house in order,” Dr. Tedds said. “Nobody ever wants to take that on.”
Politicians are reluctant to talk taxes when times are tough, and Dr. Tedds agrees a consumption tax when oil prices were in the gutter and COVID-19 was squeezing the economy would have been ill conceived. When times are good, politicians are nervous about hurting economic growth.
But Alberta’s population is aging, fuelling a looming health care crisis. (Mass privatization, Dr. Tedds said, is not the solution.) Eventually, economists argue, Alberta must redesign its revenue strategy.
Chetan Dave, an economics professor at the University of Alberta, said the UCP is married to its goal of keeping net debt to GDP ratio at 30 per cent or lower. This, he said, is problematic, especially as the government brushes aside rethinking revenue.
“They refuse to diversify revenue steams for the budget going forward,” Dr. Dave said. “You cannot hang your hat on oil forever.”
Dr. Dave favours cutting corporate taxes, returning to indexed income taxes, increasing revenue from energy royalties and perhaps a small sales tax.
Big Ideas
The economists largely expect Alberta to shy away from projects with big price tags. However, if the UCP does unfurl a big-ticket spending item, Dr. Tombe thinks the government may gamble on carbon capture, utilization and storage.
The federal government is expected to move on CCUS in its forthcoming budget, Dr. Tombe said, so if Alberta directed money that way, it could claim it beat Ottawa to the punch. Further, Alberta is fond of projects that work to lower emissions without being tied to a carbon tax.
Dr. Tedds says she believes Alberta will spend some of its oil money on health-care. Indeed, the government has signalled it wants to increase the number of private centres where residents receive publicly funded surgeries; and expand hospital capacity, particularly in intensive care units. While she champions health-care spending, Dr. Tedds does not believe Alberta should rely on volatile energy royalties to pay those bills.
“But it is what Alberta does, every time.”
If Dr. Dave had his way, Alberta would pour money into public goods and services that help attract and retain talented people and spur diversification, such as the health care sector, higher education and children’s services. Spending in these areas, he said, helps creates an environment where businesses thrive.
Further, COVID-19 changed the way people live and work. The government needs to produce a budget that reflects that, he said. Dr. Dave, however, does not expect the UCP’s budget to contain creative ideas.
“Aside from just doing cuts, there’s just zero imagination,” he said. “They are just not looking to the longer term, after we are out of this pandemic.”
He added: “I do not understand politics. I understand economics.”
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