High stakes for Alberta in NDP gamble to balance budget on pipeline projects
Most finance ministers put on new shoes before releasing a budget. Joe Ceci popped on a virtual reality headset instead.
He probably should have donned some rose-coloured glasses.
How else can one explain the provincial government touting its plan to return to balanced budgets in five years, banking on additional revenues that will begin flowing when — or, more appropriately, if — new pipelines are constructed in Canada?
“We’ve built (those pipeline revenues) into the budget because that’s what everybody believes will happen,” Ceci told reporters Tuesday in Edmonton at a pre-budget event.
Well, not everyone, if he talks to protesters, certain mayors and the premier of British Columbia.
But I hope Ceci is correct, because the entire province has a lot riding on this issue.
As the finance minister unveils his new budget Thursday, the fiscal blueprint is expected to show how the province will gradually transition from large annual deficits — below $9 billion next year, according to one source — to balancing the books by 2023-24.
It’s obvious the fortunes of the energy sector are a linchpin to future success.
The Notley government has previously said building the Trans Mountain pipeline expansion to the west coast would be worth $1.5 billion annually in additional provincial revenues, shrinking the price discount affecting Alberta’s heavy oil.
According to last year’s budget, if Trans Mountain and Enbridge’s Line 3 replacement project go ahead, petroleum producers could earn up to $7 more per barrel.
In turn, higher oilpatch investment, production and prices would bolster government royalty payments to the tune of up to $9 billion by 2022.
It’s a lot of money, and would go a long way toward helping balance Alberta’s financial books in the future.
But should we really be counting on that money just yet?
You’d have to be living in an alternate universe to not see that pipeline developments face significant hurdles, from legal challenges to environmental opposition.
The Line 3 project still needs final approval in Minnesota.
Construction of Trans Mountain will require ongoing federal backing in the months ahead as protests on the west coast ramp up.
Sitting on the sidelines, credit rating agencies and economists will be closely watching the new Alberta budget.
They want to see a detailed, credible strategy on how Alberta can balance its books in five years, how much of that plan relies on higher oil prices, and how the government treats future pipeline-driven revenue.
“In terms of building a budget (with) a degree of conservatism in it, that would certainly seem to err on the ambitious — or optimistic — side,” said Travis Shaw, a vice-president with credit rating agency DBRS.
“In the event these pipelines don’t move forward on the schedule they built their plan on, will there be any offsetting fiscal measures — or can we anticipate wider deficits and further increases to debt?”
Nothing prevents Alberta from building a longer-term budget plan that’s predicated on pipelines being competed in the coming years.
The auditor general’s office says the province can forecast any amount of revenue it wants in a budget document.
But at the end of the year, those expectations need to turn into cold, hard cash — or the province must have a realistic expectation it will collect on the revenue.
If not, the deficit gap will grow.
LONG-TERM DEFICIT
Ceci will also need to detail how Alberta will shrink the long-term deficit, which isn’t just caused by lower energy prices, but structural issues: too much spending and not enough reliable revenue.
“I think the worst of the crisis is behind and it’s time to address potential structural (deficit) issues,” said RBC senior economist Robert Hogue.
“We do believe the deficit is not just cyclical, but partly structural, because we assume oil prices aren’t going back to $100 a barrel.”
That’s a safe bet. Fortunately for the finance minister, the province has some positive momentum to build upon.
The recession is over. The unemployment rate is falling.
Oil prices have rebounded and closed above US$65 a barrel on Wednesday, a far cry from the $47 mark witnessed a year ago.
Yet, the government is still facing a $9.1-billion deficit for the outgoing fiscal year that wraps up on March 31, and operational spending continues to go up.
Finally, there’s a telling irony here in the province carefully constructing its plan for balanced budgets in the future, built squarely on the back of pipeline-related revenues.
“I thought we were trying to get off the energy royalty rollercoaster. And if we’re serious about that, we shouldn’t really care about forecasting energy revenues,” said University of Calgary economist Ron Kneebone.
“I’ll tell you right now, a credible plan does not involve making wild-ass guesses as to what energy royalties are going to be.”
There are a lot of balls in the air as Alberta tries to plot a course toward smaller deficits and, eventually, an end to the sea of red ink.
It won’t be easy, it will require fiscal discipline and recent history suggests it won’t happen; only one budget in the past decade recorded a surplus.
Maybe Ceci was right — hightech goggles will be needed to make Alberta’s deficit dilemma turn into a fiscal reality.