Alberta’s deficit drops by $10.5B, thanks to luck

Last month, the Alberta government announced their 2021–2022 first quarter fiscal update. I thought I’d highlight a few of the changes the update brings to the 2021–2022 budget that was released this past February.

Revenue

The first thing we notice is that the provincial government is predicting $11.3 billion more in revenue this fiscal year, compared to the original budget they released earlier this year. A little more than half of that increase comes from fossil fuel revenue.

Here’s how the revenue breaks down.

	Budget	Adjusted	Change
Personal income tax	$11.647	$12.296	$0.649
Corporate income tax	$1.891	$2.482	$0.591
Other tax	$5.527	$5.474	-$0.053
Fossil fuel revenue	$2.856	$9.760	$6.904
Federal transfers	$10.181	$11.706	$1.525
Investment income	$2.205	$3.322	$1.117
Government bus. enterprises	$1.877	$2.020	$0.143
Premiums, fees, licences	$4.133	$4.456	$0.323
Other revenue	$3.380	$3.464	$0.084
Total	$43.697	$54.980	$11.283

As we can see, the increase in fossil fuel revenue is up about 61% over February’s prediction. That’s driven primarily by higher oil prices. In February, the government forecasted West Texas Intermediate oil price at $46 a barrel. But now, they’re forecasting an average of $65.50 a barrel. WTI was barely above $50 a barrel in January, but since the summer, it’s been mostly above $65 a barrel, with significant periods above $70.

And while higher oil prices do mean higher government revenues, it also means higher consumer prices. Gas prices rose 32.5% over the past year, which not only increases what consumers pay at the pump, but transportation costs for many consumer goods. Which explains why Canada saw inflation rise 4.1% last month compared to the same time last year, the fastest rise in nearly 20 years.

More fossil fuel revenue comes at a cost.

Federal transfers make up the next largest increase, mostly due to COVID-19, economic recovery, and agriculture support. About $324 million are transfer funds from 2020–2021 that the Alberta government never spent. About a third of the federal transfer amount is health-related: a $465 million one-time addition for health care system pandemic recovery, and a $66 million increase that reflects adjustments following revisions to the national GDP forecast, based on Alberta’s share of the national population.

Most of the $1.1 billion additional revenue from investments is due to $600 million more income in the Heritage Fund and $21o million more in endowment income.

Increases to both personal and corporate income tax are a byproduct of more people going back to work and company re=participating in the economy.

Expenses

Even though the province anticipates over $11 billion more in revenue by next spring, it won’t find its way into expanded programmes and services for the general public.

In fact, the Alberta government plans to spend $47 million less on non-COVID-19/recovery expenses than originally planned.

	Budget	Adjusted	Change
Operating	$48.280	$48.468	$0.188
Capital grants	$2.608	$2.736	$0.128
Amortization	$4.009	$3.847	-$0.162
Taxpayer-supported debt	$2.323	$2.120	-$0.203
Self-supported debt	$0.441	$0.443	$0.002
Pension provisions	-$0.369	-$0.367	$0.002
Total	$57.294	$57.247	-$0.047

And even the COVID-19 expenses aren’t going to increase that much (compared to revenue increase), up only $821 million since February’s forecast.

Here’s how spending looks like for each ministry:

	Budget	Adjusted	Change
Advanced Education	$5,044	$5,069	$25
Agriculture & Forestry	$839	$855	$16
Children’s Services	$1,717	$1,767	$50
Community & Social Services	$3,886	$3,768	-$118
Culture & Status of Women	$161	$157	-$4
Education	$8,248	$8,248	–
Energy	$483	$483	–
Environment & Parks	$449	$534	$85
Finance	$1,649	$1,638	-$11
Health	$21,418	$21,581	$163
Indigenous Relations	$180	$150	-$30
Infrastructure	$425	$425	–
Jobs, Economy & Innovation	$308	$308	–
Justice	$1,346	$1,347	$1
Labour & Immigration	$200	$199	-$1
Municipal & Affairs	$247	$258	$11
Seniors & Housing	$673	$673	–
Service Alberta	$454	$454	–
Transportation	$408	$409	$1

What we see here is that 8 ministries will get a boost in operating spending (although two of them are barely boosts: 0.07% increase for Justice and 0.2% increase for Transportation).

The largest increase will be in Health, which shouldn’t be that surprising, given that we’re still in the middle of a pandemic. The $163 million increase is “mainly due to increases in physician services billing, senior’s drug benefits and service pressures, offset by various
other operating expense decreases and savings, and by a $163 million reduction in AHS amortization.”

Environment and Parks will see the next largest increase, at $85 million more, most of which will come from higher-than-expected Technology Innovation and Emissions Reduction revenue. They also plan to receive $12 million more in park fees than planned.

The Children’s Services will receive the third largest increase in spending, at an extra $50 million, but keep in mind that the federal government is sending an extra $56 million to Alberta for Early Learning and Child Care, so it’s not like this extra spending is because of altruism from the UCP government.

Finally, Advanced Education is on track to receive $25 million more, with virtually all of it going toward providing student loans.

We also see that 5 ministries will have their operating funds decreased even more.

The provincial government predicts that Community & Social Services will see the largest decrease, at $118 million less than originally budgeted. According to the fiscal update report, this 3% decrease is because the UCP government provided less income support since the federal government was providing extra income support through pandemic programmes (such as the Canada Recovery Benefit).

Indigenous Relations saw the second largest decrease, of $30 million. The fiscal update was silent on why the government cut this portfolio’s budget by $30 million. While it still is a $48 million increase over what they spent last year, it’s $63 million less than what the NDP spent on the portfolio 3 years ago, in their final budget.

	18–19	19–20	20–21	21–22 budget	21–22 adjusted
Indigenous Relations	$213	$162	$102	$180	$150

Deficit

With the increase in revenue and the slight decrease in expenses, this leaves the deficit in a better position than originally forecasted.

In February, when the 2021–2022 budget was released, the government forecasted a $18.22 billion deficit, up from the $16.96 billion they racked up last year. As of last month, that has dropped to a $7.76 billion deficit, which means the government shaved off about $10.5 billion off the deficit.

Although, technically, they didn’t actually shave off much. It’s not like they caused fossil fuel revenue increase by nearly $7 billion. Even though personal and corporate income tax was up by $1.2 billion, it wasn’t because they raised taxes. And they can’t really take credit for the federal government transferring an extra $1.5 billion.

So while the deficit is projected at 57% lower now than February’s original projection, it’s not because the UCP are deficit-slaying masters. So, we should be careful about praising them for this development.

Even the government recognizes this. Sort of.

While the recent increase in energy prices is encouraging, Alberta’s government is aware the situation can change rapidly and the year is far from over. There have been dramatic fluctuations over the past year and a half. Instead of relying on volatile resource revenue, government must control spending.

Q1 update: Alberta’s Recovery Plan is working, Government of Alberta, 31 August 2021

I just want to point out that “controlling spending” isn’t the only option to “relying on volatile resource revenue”.

We could instead rely on stable, dependable, sustainable revenue, such as higher corporate income tax, higher personal income taxes on higher incomes, and a sales tax.

Focusing on cutting spending instead of increasing revenue is a choice. The UCP government is choosing—on purpose—to cut expenses. And if the goal is to balance the budget (and eliminate debt), as long as they don’t find more revenue, those spending cuts will have to be even deeper.