The Alberta government’s recent budget reveals- once again- the provincial treasury’s over-dependence on non renewable resource revenue. This budget continues a six-decade tradition of resource revenue making up for a deficient, unstable revenue base to produce budget balance. However, as the chart below illustrates Alberta has never had a budgetary surplus, when excluding resource revenues since 1965-66. The surplus targets for fiscal years 2022-25 also produce the same results. This year, Albertans are expected to only contribute 78 cents on the dollar to Alberta’s expected revenues. If oil persists at an average of $90 U.S. per barrel over the whole fiscal year beginning April 1, then an extra $10-billion will be received meaning taxpayers will only foot 59 per cent of the bills.
SUrplus-deficit adjusted for NRRR Alberta's tax advantageChanging sensitivities on oil price
This remarkable turnaround is due to changing sensitivities of resource revenue to higher oil prices. In last year’s budget, which predicted an average of $46 U.S. per barrel, one dollar change meant $230- million more or less to the treasury. At this year’s budget price assumption of $70 U.S., the sensitivity is an astounding half a billion dollars. The change in sensitivities is due to two principal factors: 1) at higher prices bitumen facilities reach out pay out earlier and pay higher rates, and 2) higher production from the oilsands. Conventional oil production is expected to remain flat while oilsands production is expected to grow modestly from 3.3 million barrels a day to 3.368 million barrels in 2024-25.
As noted in an earlier post, if $90 U.S. a barrel remains, the government will look like fiscal geniuses. However, as many analysts and editorialists have pointed out, Alberta is not out of the woods- its dependency on bitumen production is growing and expansion prospects will be limited to growing unused capacity. There are the ESG concerns surrounding how clean Alberta’s oilsands are actually in comparison to other crudes. As institutional investors and banks continue to burnish their ESG (environmental, social, and governance) credentials, they will eschew additional fossil fuel lending or investment.
Federal Mismanagement
Alberta’s preoccupation with federal interference and Kenney’s persistent grievances towards Trudeau and the federal Liberal government were again on display. While the budget acknowledged Ottawa’s financial support in the child care and labour training areas, a whole chapter was devoted to “Canada’s Growth and Prosperity.” The real message was how Alberta, if left alone, will bring Canadians economic prosperity.
The primary complaint was federal policies that have discouraged investment. The key to Canada’s economic prosperity, according to the Alberta government, is a strong energy sector- with the usual exaggerated data of direct and indirect jobs created by the sector playing a supporting role. According to the Canadian Association of Petroleum Producers, Canada is losing its share of investment to other jurisdictions. Using 2014 investment levels, the peak of oilsands expansion investments as the base year, CAPP uses this peak to make the case for a departure of investment. Such a claim is highly misleading because Canada’s 10 per cent share in 2014 was not a normal level. –
Next comes the “responsible energy producer” and novel argument that “premature divestment” is “causing shortages across the world, resulting in energy affordability and security issues” (p. 49). Citing Canada’s energy resources as cost competitive, a Chart on page 49 cleverly omits Saudi, Mexican, Venezuela, Norwegian or Russian oil costs. Alberta’s ESG card then is played with a picture showing Canadian companies like Vermilion and MEG resources being the most sustainable energy producers in the world. According to this map, the reader is lead to conclude that Canadian energy companies are both responsible and ethical producers of oil. The sources cited include BMO Capital Markets, Bloomberg, and CSRHub. Yet, it is not clear how the data from June 2021 was agglomerated or how the methodology was constructed.
Alberta’s role in achieving Canada’s ESG commitments was full of past achievements on flaring, coal generated electricity wind-down, and the hundreds of projects with government funding which have reduced emissions by over 43.3 megatonnes since 2009, an almost insignificant amount of GHG produced in the province over that time period. Emissions intensity is falling, but as production climbs the claim does not tell the complete story. A new ESG secretariat, “the first of its kind” in any province, will act “as a clearinghouse for factual ESG data and performance metrics across industry sectors” (emphasis added, p. 53).
With Alberta’s abundance of natural resources, a highly skilled workforce, and more than 100 years of experience in the energy industry, Alberta is positioning itself to be a global ESG leader for clean, secure, and ethically sourced energy.
The solutions to help Canada achieve its emissions reduction commitments appear to be all technological related. Alberta’s key priorities are carbon capture and underground storage (CCUS) and hydrogen. Much is made of Alberta’s unique geology for CCUS and the enormous potential of blue hydrogen which will be heavily dependent on CCUS. According to the document “Alberta can be positioned to power Canada’s economy,” but there are a few requests of the federal government (taxpayer). Alberta’s priorities include supporting investment, but especially an investment tax credit “in the range of 60 to 75 per cent of the investment that could unlock 50 megatonnes of capture per year” (p. 57). Canada is expected to enhance global energy security which presumably means allowing more bitumen and other fossil fuel production to grow. Part of the request is about removing legislation such as C-69 and C-48 which have “dampened Canada’s investment climate. Finally, the federal government is expected to address the fiscal imbalance which results in Ottawa taxing too much and making the provinces fiscally dependent on Ottawa to fund programs under provincial jurisdiction like education and health.
Targeting hypocrisy
These demands are then followed by a recital of historic fiscal grievances, some with more merit than others. These grievances include Alberta’s contributions to federal coffers significantly surpasses other provinces; equalization; a parsimonious fiscal stabilization program; the need for a large boost in health transfers (a request shared by all other provinces); and the inadequacy of targeted federal funding (pp. 59-61). The chief beef is that targeted funding places federal priorities over provincial ones, undermines constitutional responsibility of provinces, creates unnecessary administration and expectations that programs will continue after federal funding is withdrawn. Fair comments. This is part of a long-standing critique of conditional forms of federal transfers.
What is mildly hypocritical is the reality that much of the funding granted to municipal governments and public institutions, such as Alberta Health Services are likewise conditional or targeted. Targeted programs in this year’s budget included additional funding for: expanded health care capacity; expanded capacity in targeted areas of the adult learning system; mental health in schools; curriculum development; targeted employment growth in specific areas to foster economic growth, including technology, veterinary medicine, agriculture, financial services, and aviation.
The biggest area of provincial targeting for public institutions and municipal governments is the $7.5-billion Capital Plan. The provincial Treasury Board makes the final call on new capital investments and major rehabilitation of existing infrastructure. Questions surrounding how scientific and non-partisan decisions are made inside government are perennial.
A casual read of the tables on pages 165 to 170 shows a distinct preference for capital projects outside the Alberta Capital Region. This fact was not lost on Edmonton Mayor Amarjeet Sohi 
who termed the budget a “slap in the face.” Although Edmonton received, along with Calgary, significant continued funding for its LRT and ring-roads, the only significant new capital boost was for a $1 million planning study for Edmonton’s aging law courts, a total of $50-million -spread out over three years- for a Brain Centre at the University of Alberta Hospitals and $3-million for a critical care program at the Stollery Children’s Hospital. Previously announced commitments for the Yellowhead and Terwillegar expansions, the South Edmonton hospital, the Zwozdesky Centre in Norwood were continued, In contrast, the Calgary list is long including the Lougheed, Rockyview and Foothills hospitals, the Calgary Cancer Centre, Bow Reservoir, Mount Royal University, SAIT, the University of Calgary’s veterinarian program, the Calgary Zoo, and Glenbow revitalization.
Revenue Options moot
At this point, with expected revenue from non-renewable resources seemingly poised to beat the record haul of $14.3 billion in 2005-06, there is no political appetite for thinking ahead to the next oil price bust. Finance Minister Toews passed on holding a comprehensive revenue review consistent with a long-term denial that Alberta only has a spending problem. This is a pity since the fiscal pressure is off and there is time to rationally consider what to do with the bonus revenue from the sale of Alberta’s resources. Options will be limited to paying down debt or building up fiscal reserves rather than comprehensively examining how to make Alberta’s long-term finances sustainable. UCP cabinet ministers probably wish to bask in their fiscal triumph for a while before considering how they will use their newfound fiscal flexibility to gain re-election.
Credit rating agencies may perhaps adjust their outlooks. all of which are stable, to positive. However, expect their commentary to again raise concerns about the province’s low taxes and volatile revenue stream.
Related Posts