As the spring season approaches, so too does budget season, with new budgets at the provincial and federal levels about to sprout forth even as snow still covers the ground.
This year, Alberta is the first provincial jurisdiction to table a budget, one that is heavily influenced by almost a year of dealing with COVID-19 and the related fallout across all departments and agencies.
Alberta’s financial challenges are unique given the impact of the energy sector to the province’s bottom line. Low energy prices dating back to 2014, coupled with a Saudi/Russia oil price war that led to negative prices for oil in April 2020 have meant that the decline in resource revenue to the province’s coffers remains a serious challenge no matter who is in government. Adding the massive financial impact of COVID-19 to the balance sheet has resulted in very challenging times for Alberta’s economic outlook.
The current government, led by United Conservative Premier Jason Kenney, proposed to balance Alberta’s budget by 2023. Even before the budget, it was widely understood that a 2023 target for a balanced budget was no longer possible.
Combined with the economic challenges, the Kenney government has also faced some serious issues of its own regarding parks policy, a proposal to open coal mining in Alberta’s Rocky Mountains, as well as the controversy of “Travel Gate” with a Minister, MLAs, and the Premier’s Chief of Staff all traveling abroad during a time when the government was telling Albertans to stay home.
As the government reaches the midpoint of its four-year mandate, the 2021 budget is an opportunity for the government to focus on the second half of its term and try to look beyond the immediate fiscal challenges of the pandemic. Alberta’s political landscape is a clear two-horse race between the UCP and a very organized NDP led by former Premier, Rachel Notley. Adding to Kenney’s challenge on his right flank are independence minded “Wexit” types who may opt to vote for the Wildrose Independence Party or simply stay at home at the next election.
Alberta will run a deficit of $18.2 billion in 2021-22, which means by the end of this fiscal year, Alberta’s debt will hit a record high of almost $116 billion. The government is also forecasting a deficit of $11 billion in 2022-23 and $8 billion in 2023-24. Unlike previous budgets, while “balancing the budget remains a high priority,” the government is only saying that it will return to balance post-pandemic.
Of interest, the government is making a commitment to keep the debt-to-GDP ratio under 30 percent, a datapoint that other governments, notably the Trudeau federal government in 2015-16, used to justify its financial forecasts.
In the leadup to the Alberta budget, some economists and pundits called on the government to implement a provincial sales tax or other tax measures. Finance Minister Travis Toews made it clear that the budget would not impose any new taxes or tax increases. Indeed, the Minister made sure to focus his attention on the federal carbon tax, suggesting that “the biggest obstacle to recovery may be our own national government.”
Alberta vs Ottawa
An Alberta budget would not be complete without a reference to the state of the federal-provincial relationship. This budget not only called out the carbon tax, but reiterated Alberta’s case that federal changes to the fiscal stabilization program in the November 2020 Fall Economic Statement were unfair. It went as far as accusing the federal government of “arrogance and unilateralism” while calling on it to “respect Albertans’ priorities.”
The budget document also noted 2020’s “Fair Deal Panel” as well as current legal challenges to the federal Bill C-69, which the Alberta government considers a major intrusion into its provincial authority. It also notes the upcoming referendum this fall which will likely include a question on equalization reform as well as “Senate Elections” – another opportunity for the UCP government to make the case to Alberta voters that it’s “Standing Up to Ottawa.”
The Future of Energy Policy and Economic Diversification
The budget also made it clear that while economic diversification is important to the government, this includes the energy sector. Minister Toews stated that while some suggest that economic diversification means a transition from oil and gas, that is not the position of the government. The budget documents highlighted the productivity of the energy sector, the reduction in the GHG intensity from the oil sands, and technological innovation from industry.
The budget also highlighted investments in renewable solar and wind projects in the province and announced that Alberta will create programs to promote Environmental, Social and Governance (ESG) plans. This is a key recognition that international investors are increasingly prioritizing jurisdictions who have strong ESG plans in place.
Of interest, Minister Toews took time in his budget speech to highlight several fintech companies who have recently relocated to Alberta. The UCP government was criticized for cutting tax incentives for the tech industry when it was first elected, so the investment of $500 million for the innovation economy, operational funding to Alberta Innovates to upgrade accelerator programs, new R&D tax incentives, and a new “concierge office” to help companies set up in Alberta are a change of direction.
During 2020, the Alberta government was able to move its Capital Plan spending forward as it tried to get infrastructure dollars out the door for already planned roads, schools, gas lines, etc. 2021’s Capital Plan will be increased by $1.7 billion to $20.7 billion, which the government says will create 50,000 direct jobs through to 2024.
Spending on health care will increase by $900 million this year, to $23 billion. This budget includes $3.4 billion specifically for health-related capital projects.
Of note, the Kenney government continues to make the case, as it has since the 2019 election, that Albertans spend more on health care and get less services. It highlighted that Alberta’s annual per capita spending of $5,147 is higher than the BC/Ontario/Quebec average of $4,609. We expect this data point to continue to be used as the government pursues substantial changes to Alberta’s health care system.
Primary and secondary education spending remains steady at $8.3 billion, like previous years.
Public Sector Wages
It was expected that Minister Toews would provide direction on the size and scale of Alberta’s public service. Toews stated that changes are coming once COVID has been controlled and promised that public sector salaries will be a major target for the government in the coming months, noting Alberta “no longer (has) the revenue to justify higher comparative wages.”
He also noted the Ministry of Health review of Alberta Health Services was underway as COVID hit, and the Minister noted that health care system costs would need to be more in line with other Canadian provinces.
While no immediate cuts to the public sector are planned, the budget clearly lays a path for a smaller public service, with a total reduction in the size of the broader public service of almost 8% by 2023, including cuts made to date. Upcoming labour negotiations with nurses, unions, and other public sector unions will likely be tense, and given its ties to organized labour, the opposition NDP will be certainly be seeking a fight inside and outside of the Legislature.
For a government that has appeared to be adrift from a policy and political standpoint over the last several months, the budget provides a blueprint for Premier Kenney, his Cabinet, and his MLAs. Battle lines have been drawn between the federal government and Alberta and with the public sector.
Alberta remains almost evenly divided between the UCP and NDP and the choices made by the government will also provide the NDP with the opportunity to make its case to Albertans in the months leading to a 2023 election.
At the same time, the federal/provincial relationship will remain an area of focus with a fall referendum – which could include questions on “patriation” of certain institutions from federal to provincial responsibility, including a provincial police force, as well as opting out of the Canada Pension Plan in favour of an Alberta Pension Plan.
Alberta is the first provincial jurisdiction to table its budget this year. The main question that remains for Alberta and other jurisdictions is: will these plans hold or will more COVID challenges mean they are worthless within a few weeks or months? StrategyCorp will continue to be watching.