Originally published 2 March 2018
Finance Minister Joe Ceci’s fiscal update issued on 28 February was more upbeat than previous reports. The headline number was a $1.4 billion reduction in the provincial deficit forecast for the fiscal year ending 31 March 2018. For critics, the government kept the spending floodgates open; for partisans the economy was growing strongly courtesy of the sound steerage of the NDP government. Below we examine some of the details.
Expenditures
Operating spending (including the Climate Leadership Plan) budgeted last March at $46.7 billion is forecast to total $46.9 billion. The main reason for the increases are in Community and Social Services and Health. Debt servicing costs will come in $43 million lower than estimate at $1.355 billion. Other expenses, not included in operating expenses, include amortization costs of $3.4 billion which are on target and capital grants of $3.7 billion ($427 over budget). Also spending on the Climate Leadership Plan for capital grants was over budget by $323 million. There are a number of expenditure adjustments including disaster assistance of $492 million (or $259 million above budget). The bottom line, total expenditures of $55.9 billion or $1 billion over budget. The main reason was the rise in capital grants.
Capital spending (as distinct from capital grants) will come in on budget, in spite of some re-profiling reported in the second quarter. The major change is that re-profiling has allowed higher payments to municipalities for infrastructure. Capital spending of nearly $9.2 billion is an astounding 39 per cent above capital spending in the previous year.
Revenue
Despite the rosy outlook for the economy, personal tax income is now forecast to come in $322 million below budget and corporate taxes $66 million below budget. Other taxes, including such items as the education property tax and fuel tax, came in $163 million below budget. The two areas of strength for the provincial government are the two most volatile: resource revenue which was up $780 million and investment income up $680 million. Another source of volatility is the Balancing Pool which is budgeted at $771 million after a charge (negative revenue) of nearly $2 billion last year.
Financing Requirements
Financial requirements, which include new borrowing for the capital and fiscal plans, and borrowing for provincial agencies such as the Alberta Capital Finance Authority, ATB FInancial, the Orphan Well Association, and the Balancing Pool, will total $22.7 billion including for a cash reserve of $5 billion. Surprisingly, the update shows that only $10.7 billion has been issued to date which implies that over $11 billion is expected to be issued before the end of the fiscal year- a very large requirement. Bond maturities this year are $6.9 billion. $15 billion in new debt, including pre-borrowing of $5 billion will result in total debt outstanding of about $65 billion at the end of March 2018.
The Economy
The Update characterizes growth as exceeding expectations. Business output is expanding but has not reached levels seen in 2014. This is attributed to an expanding oil sector. However, business investment continues to lag -a disturbing indicator. Although labour markets are strengthening and population growth has resumed, risks include limits to oil assessing foreign markets, lower oil prices due to increased shale production, and uncertainty around NAFTA negotiations. In the economy section, there is a description of the mechanisms at play that influence pipeline capacity and the resulting rise in the rising differential causing losses in the tens of millions of dollars each day to Alberta producers. As noed above, this optimistic perspective is belied by income taxes coming in below initial budget estimates.
What this means
It appears that the Government is now exercising some restraint on overall operating spending although capital grants have increased significantly over budget. The reduction in the budget deficit is precarious since it is founded on 1) volatile investment income (Heritage Fund) which could reverse if international equity markets continue their descent; 2) volatile resource revenue; and 3) volatility in the provision for the balancing pool, the latter’s determination is explained as improvements in net income.
In sum, Alberta’s fiscal structure is highly sensitive to four market factors: international equity and bond prices (Heritage Fund); the price of oil and natural gas; the price of electricity in Alberta; and Canadian and foreign interest rates (debt servicing). While investment banks provide hedge products or a type of insurance to mitigate adverse movements, the fact remains that Alberta’s finances are more and more in the hands of external forces. All these uncertain factors recommend that a stable sales tax is an important fiscal policy instrument that would instill some stability into the fiscal picture.
Links to the News release and Third Quarter Update 2017-18
are found here.