What is behind Alberta’s surprising reversal of fortunes? Hint: these are the oil prices

This column is an opinion of Trevor Tombe, professor of economics at the University of Calgary. For more information on CBC Opinion Section, please consult the Faq.

that of Alberta last budget update began with what is surely one of the biggest understatements in provincial tax history:

“The financial position of the Government of Alberta”, it reads, “has changed significantly from the forecasts presented in Budget 2021. ”

This “significant change”, however, was one of the most significant improvements in public finances that Alberta has seen in its 116 years.

The government now projects that the deficit for 2021/22 will drop from $ 18.2 billion to $ 5.8 billion – which, while still large, would be the smallest deficit since the fall in oil prices in the United States. end of 2014. Looking ahead, this improvement of $ 12.4 billion equates to more than $ 2,800 per Albertan. Adjusted for population and inflation, this is the most significant year-over-year improvement in History of Alberta. And as a percentage of GDP, it’s the highest since 1987.

It’s a surprising reversal of fortune.

The uncertainty remains, of course. But even despite the recent the price of oil is falling – which are down around 20% this month due to concerns over the new COVID omicron variant – the budgetary projections are reasonable. The government projects oil prices of $ 63.50 (US $ WTI) by 2023/24, for example, which is not too far from what investors bet on.

While this is good news, these short-term gains can unfortunately mask some important risks and could distract from solving longer-term challenges. To understand this, we must first appreciate what is driving the incredible improvements this year.

Why Alberta’s deficit has shrunk

The government has a theory: “The second quarter tax update is here and the results are STRONG! said a video tweeted by Alberta Premier Jason Kenney, who added that “Alberta’s stimulus package is working”.

But this is not entirely correct.

Alberta’s improving financial situation has little to do with the government’s stimulus package. Very little.

Instead, the deficit narrowed due to unforeseen (albeit very welcome) increases in energy prices as well as other positive external developments.

This year, the government is forecasting oil prices of $ 70.50 per barrel, which is a significant increase from the initial $ 46 per barrel in the 2021 budget. This extra $ 24.50 per barrel is a lot for a province. who product more than 1.3 billion barrels in one year. Natural gas prices are also on the rise.

Together, that translates to an additional $ 8 billion in natural resource revenue this year alone.

Other factors are added to this windfall. Higher oil prices lead, for example, to higher business profits and employment income, and therefore higher tax revenues. Strong stock markets and increased federal transfers are also helping. I illustrate all the changes below.

It is clear that the improvements are beyond the control of the Government of Alberta.

Either way, that’s good news. And it does not stop there.

A balanced budget next year?

One little-noticed but surprising aspect of the Budget Update is how close a balanced budget can get.

Depending on how dangerous the omicron variant is, it is possible that the government – just may – be able to balance the books by 2023, or even next year. (Which is crazy… but also, not crazy.)

What would it take? An increase of about $ 5 to $ 7 a barrel in oil prices above government forecasts. That’s it.

Each increase of $ 1 from the projection of $ 63.50 in 2023 translates to almost $ 450 million in additional tax revenue and resources. So if oil prices hit $ 69 a barrel – near the high end of private forecasts, and therefore not crazy – then the budget could likely balance out that year. And if prices hit $ 71 a barrel or more next year, then maybe even sooner.

The next few months will be critical. But in any case, you shouldn’t dwell too much on the short-term gains.

The budget update also sheds new light on two big, longer-term challenges that require action now.

Alberta’s challenges ahead

First of all, the economy.

The strength of the recent economic recovery is far beyond what many expected earlier in the pandemic – thanks to rapidly available vaccines. But it seems increasingly likely that despite this, Alberta’s economy could consistently fall short of its previous trend.

Consider the government’s projections for 2024.

By this year, they reasonably suspect the province’s economy could be seven percent lower than their pre-COVID forecast. That’s a $ 32 billion gap. (And mainly due to the fact that about 200,000 fewer people live in Alberta by 2024 than expected, but that’s another story.)

It is not unique to Alberta. The Bank of Canada recently lowered his estimate of the overall growth of Canada’s “potential output”, reflecting the decline in business investment. For Alberta, investment challenges are compounded by a potentially significant skills mismatch between people displaced from resource sector jobs and employers in other sectors.

The unemployment rate is now projected at 5.7% by 2024 (a high level by Alberta standards and higher than before the 2015 recession). Education and training will be essential.

Second, our dependence on resource income remains high.

We currently need 26 cents of every dollar of total government revenue from natural resources in order to balance. By 2023, this figure will drop somewhat to 20%. While this is an improvement, even that is above the 17% required under the previous government’s 2018 “Path to Balance”.

This does not mean that the plans of the previous government would have worked. COVID would have derailed these plans, or any other, from the rails. But it offers an important perspective. It measures how much of our government’s revenue is – and will continue to be – at unnecessary risk, even after recovering from COVID.

Despite the rhetoric around diversification and prudent tax planning, Alberta remains firmly on the resource revenue roller coaster (Whee!) Without a clear plan (or even a sketch of one) to get by.

Concluding thoughts

The tax update (and this article) is a lot to digest. And as sane or prudent as a government’s plans may be, COVID can throw many curveballs ahead.

After years of economic and fiscal challenges, it’s worth celebrating the good news when it arrives. But not at the cost of avoiding securing a more solid fiscal future in the long run.

It is common for governments to take credit for good news; just as it is up to the opposition parties to blame them for the evil. But in this case, it’s about higher oil prices. And what the roller coaster gives, they can take away.

Alberta can (and should) use this precious leeway to finally plan for a stable and sustainable financial future.

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Felix J. Dixon