What to watch for tomorrow….

Originally posted on 21 March 2018

• Provincial Finance Minister Joe Ceci brings down his fourth budget.
• Many, many moving parts
• Don’t expect a lot of new spending or new tax hikes
• A path to balance by 2023 has been signalled

As a budget is constructed there are a great number of moving parts. Alberta’s public sector embraces both the formal public service with about 30,000 employees and then the broad public sector which delivers health, education, and social services  through a range of provincial agencies, school boards, universities, colleges, and indirectly municipal corporations.  The latter part employs well over 100,000 Alberta workers. Most government ministries have a constellation of agencies looking to their home ministry to support their programs and services. This framework encourages the agencies, through their executive, naturally to seek support from ministries for more capital and operating budgets.  This behaviour is not only self-interest, it is rational and tied to the interests of the agency’s clients, whether students, patients, associated businesses, or employees.

So what to look for precisely in tomorrow’s budget?

1. Has program spending materially increased from the targets set in last year’s budget? See table below.
2. Has the capital budget been pared down through deferrals?  Do we expect to see a flurry of increased activity leading into the expected May 2019 election? What will be the profile of spending in the two major cities where the most seats are up for grabs?

From Historical Fiscal Summary- 2017 Budget page 125
Expenditure	2014-15	2015-16	2016-17F	2017-18E	2018-19T	2019-20T
Health	19366	19996	20773	21449	21980	22652
Basic/Advanced Education	13103	13673	13991	14353	14693	15041
Other Program Expenses	12395	10375	13715	13623	14505	14648
Capital Plan- fully consolidated		n/a	9175	7996	8137	7497
Revenue	2014-15	2015-16	2016-17F	2017-18E	2018-19T	2019-20T
Personal Income Tax	11042	11357	11459	11177	11609	12159
Corporate Income Tax	5796	4195	3344	3918	4464	5072
Resource Revenue	8948	2789	2430	3754	4226	6628
Investment Income	3113	2544	2886	2193	2231	2315
Debt Servicing costs	722	776	1027	1398	1807	2286

3 Tax revenue has been weak for the past number of years.  In the fiscal update last month, income tax revenue was down from the Budget. This in spite of a recovering economy and tax increases. How will the Finance Minister justify higher revenues in the case of an economy that is expected to slow from fairly robust growth in 2017?  A similar case can be made for corporate income taxes which have stagnated since peaking in 2014-15
4. What is the government’s outlook for investment in 2018?  Judging from reports out of the oil industry, things do not look particularly rosy.  Drilling remains weak and, as  the battle over Trans Mountain drags on, this simply adds to the uncertainty of investors. Housing starts which have held up well throughout the downturn will likely fall this year and massive private sector investments, will also tail off this year (Ice District and Northwest Upgrader). This will leave the government carrying most of the weight including municipal government. The recent energy diversification initiative may help but it is unclear how successful such a project will be especially as a long-term provider of jobs.

5. How much borrowing is the province going to be doing?  What are the interest rate assumptions in the forecast?  Alberta is vulnerable to refinancing its maturing debt at higher rates and higher spreads relative to other provinces.
6.The oil and natural gas price assumptions will be one of the keys to balancing the budget over the next five to six years. Optimistic prices will be subject to criticism.  Also the volume of production is a critical assumption as planned oilsands projects are assumed to be built and remain economically viable.
7.Will there be any accounting changes that may move the deficit calculation higher or lower?
8.Watch for any references to the growing orphan well inventory.  With the bankruptcy of Sequoia Resources, there will be increased attention on the capacity of the industry and the government to pay for the clean-up.
9. Other factors will also come into play that could create more volatility in future years and that are difficult to predict.  Firstly, there is the bitumen in kind commitment to the North-west Upgrader.  A second high-profile issue is the Balancing Pool and fluctuations in the costs could be significant.  Another  is the provision for pensions which has been a positive for the provincial treasury in the past few years.  Higher interest rates should imply that the liability of the various provincial sponsored plans may go down.
10. And don’t expect a White Paper on a new provincial sales tax!