Higher oil prices fail to patch gaping hole in Alberta's budget

Higher oil prices fail to patch gaping hole in Alberta's budget

Alberta's Finance Minister Joe Ceci is sticking to his deficit forecast of $10.8 billion for this fiscal year despite major spending increases.

In this week's third quarter update, the finance minister says "the storm clouds are starting to recede with a little more sunshine peaking through" but the province is no where near out of the woods just yet. 

Ceci points to more spending in the oil sands and an increase in drilling activity versus the same time last year. However, the finance minister concedes the average Alberta family isn't seeing signs of recovery just yet. 

Despite higher oil prices through the new year, income taxes will be $927 million lower than initially planned in the 2016/17 budget and over $200 million lower than the second quarter forecast from last November. However, resource revenues are now $1.1 billion higher than the original budget. In total, government revenues will increase to $42.9 billion, $240 million more than the Q2 forecast.

Assumptions for West Texas Intermediate (WTI) have also been increased from US$42 to US$48 per barrel.

That's the good news.

Here's comes the bad news . . . 

The Fort McMurray wildfires has pushed disaster assistance spending to $1.35 billion, $1 billion higher than the original forecast. That number remains relatively unchanged from Q2.

Despite the big hole in the budget, the government is sticking to its plan to phase out coal province-wide. Alberta will book a $1.1 billion charge this fiscal year, to be paid out to various coal power producers. Payouts will be phased over 14 years to be funded from the province's new carbon tax levy. Ceci says the coal-phase out will benefit the environment and create jobs as some facilities get retooled from burning coal to natural gas.

That $1.1 billion payment excludes charges related to the cancelation of Purchase Power Agreements (PPA). The University of Calgary estimates that up to $2 billion may be on the line as companies cancel their power agreements on concerns that the carbon tax has rendered their contracts unprofitable. The government has already settled with AltaGas and TransCanada but a dispute with Enmax is still pending.

More money has been allocated towards education, healthcare and social spending, blamed in part on Alberta's higher-than-average population growth. The province's total expenses will increase to $53.7 billion this year, up $935 million from the November forecast and $2.7 billion higher than the original budget. Alberta's $700 million contingency fund has now vanished, absorbed into the government's expenses.

The finance minister reiterated that social spending should not be held hostage to oil prices, which is largely outside of the government's control.

As outlined in the original 2016 budget, Alberta will need to borrow $14.5 billion this year. 

Ceci says his government remains committed to gradually reducing the deficit over time without reducing government services. The government has promised to keep spending below the rate of inflation plus population growth and still thinks the books will be balanced by 2024. So far the province has managed to find some savings through the dissolution and amalgamation of 26 agencies, boards and commissions.

The government expects provincial GDP to expand 2.4% this year which will hopefully translate into more jobs and higher tax revenues.

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