Relying on royalties, budget is plausible but is it credible?
Budget is far from austere, but relies on higher royalties and oilpatch investment
This year’s provincial budget feels like a trip to the surgical ward to have your tonsils removed.
It’s painful, but you hope it eventually provides some relief.
The first budget from the UCP government was released Thursday, forecasting a return to a balanced budget within four years, but it relies on rising oil and gas production, new pipelines and increased royalties flowing into provincial coffers.
It says the economy and employment situation will get better next year, although the province has scaled back its GDP outlook for 2019. It pledges to prune operating spending over four years, yet aims to protect priority areas such as health care, children’s services and education.
It sounds plausible, but is it likely?
It will take years to make a final judgment, but analysts and business groups believe it is — and Finance Minister Travis Toews insists the province will return to a surplus by 2023, even if more spending cuts are required.
This year’s financial blueprint projects Alberta’s red ink will slowly evaporate, although the deficit will grow to $8.7 billion this year, up $2 billion over last year’s level — mainly due to jettisoning the government’s crudeby-rail contracts.
As spending reductions kick in and the economy slowly picks up steam, the deficit will shrink to $5.9 billion next year and turn into a modest budget surplus of about $600 million by 2022-23.
“These are not boom-time projections, they are cautious projections,” Toews told reporters at the legislature.
“We are committed to balancing the budget in four years.”
It won’t come without some real pain, however, such as a $275-million operating spending cut to advanced education, removing the electricity price rate cap for consumers and shrinking the public service by about 760 full-time positions this year, including 270 at the Alberta Energy Regulator.
Overall operating spending will be reduced by 2.8 per cent by the time the budget is balanced, no small feat after years of rising expenditures in Alberta.
It also projects the debt load of the province won’t grow as quickly, climbing to $93 billion by the end of the four-year period instead of $97 billion under the NDP.
“The economic assumptions are conservative, the oil price assumptions are conservative and given the spending restraint they have built in, the plan to balance by 2022-23 is entirely credible,” said University of Calgary economist Trevor Tombe.
“This is a very gradual path to balance and it’s not an austerity budget.”
On the economic front, the financial blueprint confirms what most Albertans already suspected: 2019 has been a dud of a year.
The province’s gross domestic product will only expand by a tepid 0.6 per cent this year, marking “the longest recovery from a downturn on record in Alberta,” the budget states.
However, the economy is projected to expand by 2.7 per cent next year and hit three per cent growth by 2022.
“It is realistic, mainly realistic on their revenue projections,” said Alberta Chambers of Commerce president Ken Kobly. “It is predicated, obviously, on growth in the economy.”
The unemployment rate remains stubbornly high, projected to average 6.7 per cent this year, and it won’t drop below six per cent for three years.
Several areas of the economy that have been sputtering are expected to improve, such as housing and retail sales.
There are risks, however, including volatile commodity prices, the possibility of a global recession and ongoing policy and regulatory obstacles, such as the well-chronicled difficulties building new oil pipelines.
For the energy sector, the document indicates better times are ahead, although there’s no return to the glory days of earlier this decade.
The benchmark price of West Texas Intermediate oil is expected to average US$57 a barrel this year, inching up by only a dollar next year. By the end of the forecast, oil prices are still only pegged to average US$63 a barrel.
The critical light-heavy oil price differential, which blew out last fall, will average $14 a barrel this year, having been tamed by government production quotas. As curtailment is phased out, the discount will rise in the next two years.
Even with government output quotas in place, bitumen production will increase by about 100,000 barrels per day this year to 3.1 million barrels and climb to 3.5 million bpd in 2022-23.
The budget anticipates Enbridge’s Line 3 replacement project will add pipeline capacity in early 2021, followed by the Trans Mountain expansion in the fourth quarter of 2022 and the long-awaited Keystone XL development the following year.
Toews said the plan anticipates either Trans Mountain or Keystone
will be built, but he surely knows there are no guarantees on pipeline projects these days.
Oilpatch investment remains a critical element in the budget picture.
Conventional oil and gas spending is down about 20 per cent this year, while oilsands spending is off 3.5 per cent.
But overall industry spending is projected to rise by about 4.5 per cent next year as companies increase drilling and production ahead of Line 3 beginning operations.
“I hope what happens is it provides incentives for bringing investment capital back to the province, which has been sorely lacking,” said Gary Mar of the Petroleum Services Association of Canada.
Alberta Finance estimates the Canadian economy lost almost $19 billion last year due to a lack of pipeline capacity and without new projects being built by 2023, the country will forgo more than $43 billion in lost income because of lower production and investment levels.
“We have to get these pipelines built,” said Energy Minister Sonya Savage. “The main thing we are hearing is investment will increase when we can increase production and find egress.”
Finally, resource revenues are projected to climb by almost a third to $8.6 billion by the end of these projections, helping the province reach its balanced budget target within four years.
Yet again, higher energy revenues are expected to ride to the rescue.
“We are still reliant on royalty revenues, absolutely. We are less reliant on royalty revenues than before,” noted Tombe.
The finance minister stressed the province will make further cuts if new pipelines aren’t built and revenue falls short.
Hopefully, that won’t have to happen.
It’s time to get all of the heavy lifting out of the way now before the budget pain gets worse.
The economic assumptions are conservative ... the plan to balance by 2022-23 is entirely credible.