On Wednesday, Alberta Finance Minister Joe Ceci delivered the province's third-quarter fiscal update. It was all bad news.
First, the budget is being delayed until early April – never a good sign. Second, the projected deficit for 2015-16 has risen by $200-million to a record $6.3-billion. Third, and much worse, the projected deficit for 2016-17 has doubled to a whopping $10.4-billion. This sea of red ink was due to the lower price of oil, which has dramatically reduced the royalty payments that Alberta has relied upon. And the collapse in oil prices has led to rising unemployment, reducing tax revenues as well.
The NDP government has several options to address this dire fiscal situation. None alone will solve the problem, and even attempting a few of them will almost certainly come with steep political costs.
Option 1 is to raise taxes. This will be difficult, since it was the government's first response after being elected last May – immediately increasing corporate taxes from 10 to 12 per cent and bringing in a progressive individual-income tax system that demanded more from wealthy Albertans. In the months that followed, the government increased sin taxes, hiked some user fees and introduced a consumer-based carbon tax that will raise approximately $3-billion a year. The elephant in the room is whether to bring in a provincial sales tax – Alberta remains the only jurisdiction in Canada without one. But both Premier Rachel Notley and Mr. Ceci have ruled that out.
Option 2 is to cut spending. The NDP campaigned on cash infusions into health care and education – the two largest files. This was in direct contrast to the Progressive Conservative and Wildrose parties. Much of government spending involves labour costs. We will need to watch how the government negotiates new contracts with the various public-sector unions. They have been traditional allies and supporters of the NDP, but now they are on different sides of the negotiating table. Will the government freeze salaries and ask for wage rollbacks or unpaid workdays? Or will it maintain and even increase salaries?
Option 3 is federal financial assistance. Ottawa has already sent a cheque for $250-million as part of the Fiscal Stabilization Program for those provinces that have seen a rapid decline in revenue. In addition, the federal government is kicking in $700-million in infrastructure spending. These initiatives will help, but together they represent less than 10 per cent of the projected deficit.
Option 4 is to utilize savings accounts created during the boom years. In 2003, Alberta created a sustainability fund that the government could tap into for short-term financing during a bust cycle. By 2010, this fund had grown to $17-billion. However, in every year since, the province has dipped into it; by 2016-17, it will be gone, and for the first time since the 1980s, the government will be borrowing to cover its operational budget. The government also has access to the Alberta Heritage Savings Trust Fund (created in 1976 by then-premier Peter Lougheed), which currently has about $18.2-billion in assets. Interest on the fund, which amounts to about $1-billion a year, already goes into general revenue. Completely liquidating the fund would only cover Alberta's deficits for about two years. Mr. Ceci has already ruled out that option.
Option 5 is to increase market access by allowing Alberta oil to reach U.S. and other markets. For a landlocked province, this means building new pipelines to tidewater. But every new initiative has been blocked; the Keystone XL pipeline was denied by U.S. President Barack Obama, and the Northern Gateway pipeline is dead due to opposition from the B.C. government and First Nations across Northern B.C. The last great hope is the Energy East pipeline to Saint John, N.B. This seemed to be the easiest one to build because it involved converting an existing natural gas pipeline to heavy oil. But opposition from politicians and community groups along the proposed route in Quebec and Ontario may stymie this pipeline too. Even if it were built tomorrow, it wouldn't put a big dent in Alberta's budget deficit. It would, however, create immediate jobs and boost industry confidence.
Option 6 is hoping for a rise in oil prices. This appears to be the strategy of the Notley government, but low prices look like they'll be here for several years, the result of a glut on the worldwide oil market due to high production from Saudi Arabia, the lifting of economic sanctions on Iran and the shale oil revolution in the United States.
There are no good options for the Notley government to address its worsening fiscal situation. It can point out that some, but not all, of these factors are outside of its control and that any other political party would be faced with the same challenges. Nevertheless, if Alberta is still seeing high and growing budget deficits in 2019, an election year, there will almost certainly be a new government tasked with solving the problem.
Duane Bratt is a professor in the department of policy studies at Mount Royal University in Calgary.