Province’s financial update needs clear deficit plan: experts

With Alberta set to unveil a massive deficit on Thursday, economists say Finance Minister Travis Toews’s update must include a clear, long-term path toward a balanced budget.

For months, Premier Jason Kenney has been warning of a “fiscal reckoning” due to the COVID-19 pandemic and the collapse of energy prices. On Tuesday, Kenney said the new first-quarter numbers for the 2020-21 fiscal year would show a deficit of more than $20 billion, the “biggest deficit in the history of Alberta by a country mile.”

The government’s February budget projected a deficit of $6.8 billion but became out of date weeks later when COVID-19 and low oil prices hit the province.

Economists who spoke with Postmedia said Thursday’s shortterm numbers won’t be as important as the government’s path forward.

University of Calgary economist Trevor Tombe said it’s completely reasonable for the government to run a deficit after being forced to act as a “shock absorber,” but he hopes there will be more details on what’s next.

“We need more than just a plain vanilla fiscal update,” he said. “The government took many more months than other governments and so I hope that means they put some time into layouts and plans that we can evaluate.”

Mel Mcmillan, a fellow at the University of Alberta’s Institute for Public Economics, said he hopes the plan looks at least five years ahead.

“I think the issue is really, what are the projections for the economy in terms of employment? What are the expectations of corporate income? What are the expectations of personal income? And from that, what are the consequences?” he said.

University of Calgary economics professor Ron Kneebone said that while the fiscal update will be a “horror show,” a long-term plan is necessary.

“In the short term there’s no reason for the government to be balancing the budget now because we still have short-term Covid-related spending we have to do. But the government needs to be thinking hard about what this is going to look like once this is all over,” he said.

Borrowing money for emergency pandemic spending — by the provincial and federal governments — is good fiscal policy, Kneebone said, but now the government needs to establish debt targets and stick to them.

Tombe said looking at the province’s revenue is going to be key to getting the budget back on track.

“There’s just not a credible way to balance without increasing revenues just because oil prices are going to remain a lot lower than what we were previously planning for,” he said.

In February’s budget, total revenue was forecasted to remain flat at $50 billion in 2020-21 before growing to $58.1 billion in 2022-23. The economic outlook predicted the price of West Texas Intermediate oil to average US$58 a barrel.

In April, West Texas Intermediate and Western Canadian Select briefly fell into negative territory.

West Texas Intermediate oil sat at US$42.01 a barrel as of Wednesday afternoon.

One way forward could be to increase revenue with a provincial sales tax.

Kneebone said that although it would be “startling ” if a PST were introduced any time soon, Kenney would be the right leader to do it. He used former U.S. President Richard Nixon’s 1972 trip to China as an analogy.

“Only Nixon, the anti-communist hawk, could make peace with China (and) only Jason Kenney can bring in a PST. You really need a fiscal hawk like Kenney to actually be successful in bringing it in,” said Kneebone.

Mcmillan said it will be difficult for Alberta to avoid considering a sales tax. He also suggested the current “shock” might make for a good time to reconsider the province’s use of resource revenue.

“Over time, I think we should really look at it as a windfall and plan our budget and do our budgeting so that we’re looking at financing our expenditures out of our non-resource revenues,” he said.

The province’s recovery will depend, in part, on future support from the federal government. Alberta’s drop in non-resource revenue means it will qualify for a fiscal-stabilization payment. However, Macmillan pointed out that the current cap of $60 a head means the most the province could get would be about a quarter of a billion dollars, which is small compared to the reduction in revenue the province is experiencing.

“If I was advising Justin Trudeau, I would say he needs to change the stabilization program,” he said, adding that a reform and a removal of the cap could see the province receive up to $3 billion.

Tombe predicts this year’s deficit to GDP ratio will come in about equal to 1986, when premier Don Getty’s shortfall was almost $6 billion in today’s dollars — the biggest in relative terms in the province’s history. That budget deficit accounted for about 6.8 per cent of GDP, according to data from RBC Economics.