Alberta’s deficit could balloon to $24.2 billion; finance minister warns of future cuts to services

Alberta Finance Minister Travis Toews. Alberta's deficit is forecast to hit $24.2 billion in the wake of the COVID-19 pandemic's economic fallout, coupled with a crash in oil prices, the UCP government announced Thursday in its 2020-21 first quarter fiscal update.

Alberta’s deficit is on track to hit $24.2 billion in the wake of the COVID-19 pandemic’s economic fallout coupled with a crash in oil prices, the UCP government announced Thursday in its 2020-21 first-quarter fiscal update.

The figures “are incredibly sobering” and “predict a grim reality for Albertans,” said Finance Minister Travis Toews, who hinted that further cuts to government services could be in store, in line with the first two budgets tabled by the UCP government since it was elected in 2019.

“We need to deliver the most cost-effective government services possible,” Toews said.

“That’s absolutely essential. Alberta can no longer afford to be an outlier in terms of the cost of delivering services to Albertans.”

The province’s new deficit forecast, which would be its largest since the 1980s, represents a $16.8-billion increase over the

most recent budget tabled in February

. It attributed the bulk of that increase — roughly 70 per cent — to a sharp decline in revenues.

Non-renewable resource revenues dropped to $1.2 billion — a level not seen since the early 1970s — and down $3.9 billion from 2020 budget projections. At $38.4 billion, Alberta’s overall projected revenues are down $11.5 billion, or 23 per cent, from that budget.

“The pandemic, the energy price war and global economic contraction blindsided our economy, just as it was beginning to show signs of improvement and approaching pre-recession levels of economic activity,” Toews said in his statement to the legislature.

Alberta’s 2020 budget

originally predicted revenue growth that relied heavily on investment spurred by corporate tax cuts and energy sector expansion, including pipeline construction.

But at the time, Toews acknowledged “volatility” in the energy sector and said the government was prepared to adjust the budget should it encounter certain challenges, including the economic threat of COVID-19.

The province said the global shutdown “cratered” oil demand and prices, while Alberta’s production was already limited due to a lack of capacity.

Oil prices for 2020-21 could be as low as $35.60 (USD) per barrel according to estimates, down more than $22 per barrel from 2020 budget projections.

On Thursday, Toews characterized the global economic effect of the pandemic, along with oil price declines and the province’s local challenges in dealing with the coronavirus threat, as a “triple-black swan event.”

The updated economic forecast showed Alberta’s economy is expected to contract by close to nine per cent this year, the largest decline in modern history and a decrease of about 11 percentage points from budget projections.

The government said the pandemic took a negative toll on business investment, oil production and consumer spending.

“The reality is balancing the budget will almost certainly need to be necessarily delayed,” Toews noted, adding it would be “impossible” to provide a credible date.

“We will be continuing to look for every opportunity to bring the cost of delivering services to Albertans down and in line with comparable provinces,” he said.

Alberta’s taxpayer-supported debt could reach $99.6 billion, or $22,400 per Albertan, by next March. More than 170,000 jobs in the province have been lost, and Alberta’s unemployment rate is expected to hit 11.6 per cent, on average, for the fiscal year — a seven per cent drop.

Spending for this year is projected to hit $62.6 billion, up from about $57.3 billion in previous estimates. That was attributed to government spending on public health supports and relief measures for Albertans, businesses and municipalities in response to the COVID-19 pandemic.

The Alberta government provided an additional $500 million in health-care funding in response to the pandemic, with COVID-19 operating expense initiatives totalling $3.9 billion.

The government has also added $1.4 billion to its capital spending plan for this year and plans to spend

nearly $10 billion on infrastructure projects

.

Toews said the economy is expected to see a partial rebound of 4.6 per cent next year, but “the road to recovery will be slow and fragmented.”

Employment is unlikely to fully recover until after 2021, while real GDP rates likely won’t surpass 2019 levels until at least 2022.

Toews said the government would provide an updated three-year fiscal projection in November, along with a “reset” budget in February 2021.

While economic activity is expected to improve as public health measures are gradually lifted, the government warned the pace of its recovery would depend on how the pandemic unfolds. A “severe” second wave of infections could mean additional public health measures and “derail the recovery in the global economy and oil prices.”

Balanced budget could be six years away: economist

Without changes to the government’s current fiscal policy, it would take until at least 2026 to balance the budget, according to estimates by University of Calgary economist Trevor Tombe.

He said the UCP’s plan to bring Alberta’s spending in line with B.C., Ontario and Quebec would no longer be sufficient to balance the books by 2022. Alberta would instead be on track to face a deficit of around $8 billion that year.

“Focusing just on the spending side is probably an option that the government is not going to pick, just because it represents roughly double the amount of spending restraint than they were originally planning,” said Tombe.

But he said he was struck by how little recognition there was by the government on Thursday “about the underlying source of weakness in the provincial budget, and that’s royalty reliance.”

Asked whether Alberta could re-evaluate its revenue structure

to deal with economic uncertainties

, including the possibility of implementing a provincial sales tax, Toews said it’s a question that “we as Albertans will have to grapple with” over the long-term.

“At a time like this, at a time of great economic challenge for so many Albertans and Alberta businesses, to look at raising the costs . . . would be irresponsible,” he said.

“In the longer-term timeframe, it will be important that Albertans collectively have a discussion on revenue structure, tax structure.”

Tombe said it would be sensible to consider a sales tax, but “it’s not the only option for the government.”

“We could think about gas tax changes. Gas taxes here are much lower than elsewhere,” he said. “We could think about introducing a health levy. If we were to have the B.C. health levy in Alberta, that would be about $2.3 billion (in revenue) per year. So there’s some meaningful options on the revenue side for the government.”

NDP finance critic Shannon Phillips said the UCP should restore the corporate tax rate to its previous level, after reducing it

from 12 to eight per cent

. She also suggested re-evaluating tax levels for the province’s wealthiest people.

“A very, very small incremental increase at the very, very top, for the most wealthy people in the province could move us around having to take that path of a (sales tax),” Phillips said.

She said Premier Jason Kenney was “using an old economic playbook from decades ago that does nothing to help ordinary people right now.”

“The quarrel for Albertans and many Canadians is not whether government is borrowing in order to meet the very pressing needs of economic response to a massive crisis,” said Phillips.

“The question is what are they borrowing it for and what are people getting from this?”

Mount Royal University political scientist David Taras said he doubted the government would pay an immediate political price for the record-setting deficit.

“Everybody’s in the same fiscal boat, more or less, across the world,” he said. “The scale, I think, is shocking but . . . it’s a bloodbath everywhere.”

But he said attitudes toward deeper spending cuts likely wouldn’t be favourable. If the UCP opts to slash the budget further, it could risk alienating Albertans already facing tough financial circumstances.

“At a time of dramatic need, I’m not sure that cutting makes a lot of sense,” Taras said.

“The problem for the government is that people start saying, ‘OK, this isn’t a COVID recession, this is a Kenney recession.’ ”

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