On 23 August, Joe Ceci, Treasury Board President and Finance Minister released the provincial government’s first scorecard on its April budget. The First Quarter Fiscal Update detailed the financial implications of the Fort McMurray wildfire. However, the net impact of the fire, after estimated federal assistance, is minimal in a financial sense but not a human one. A key concern for provincial fiscal planners will be the pace of rebuilding in the Wood Buffalo area and projected rise in employment in this area.
The practice of updating the public on the province’s fiscal situation goes back to the mid-1990s when then Treasurer Jim Dinning brought in a batch of fiscal rules to consolidate financial reporting and to mandate firm deadlines for budget updates and financial reports.
Revenue There were a few surprises to the upside on revenue with personal income tax and non-renewable resource revenue increasing over the budget. Both increases were surprising: in the case of personal income tax, with rising unemployment and the loss of significant number of jobs for months in the Wood Buffalo region, a $215 million increase is a surprise. Remarkably, Alberta’s population continues to grow mainly by natural increase. Unlike the mid-1980s when job opportunities existed in Ontario, only British Columbia seems to be an attractive place for unemployed Albertans to move. The key numbers to watch will be EI claims, total employment (full and part time), and the participation rate. Perhaps higher personal taxes were expected due to the increase in marginal tax brackets. Don’t be surprised though if tax planning by high income individuals will preclude higher tax revenue for the province. Rising resource revenue was a positive as the production disruption at Fort McMurray was offset by a higher price of oil and lower differential off of WTI.
Corporate income taxes are now estimated to fall by $877 million or almost one-fifth. The Budget number appeared too high as corporations losing money typically do not pay much in the way of taxes even when marginal rates have increased. A downside risk must be that losses may be applied against future taxes owing and this will be another blow to the provincial treasury. Other than additional moneys from the federal government of $652 million, the bulk of it in disaster relief, there were minimal changes on the revenue side. One useful gauge of economic activity, motor vehicle registration fees, were adjusted marginally downward.
Expenditure On the spending side, the forecast mainly highlighted the exceptional disaster spending. Health spending, the largest line item at $19 billion, is now expected to grow by a modest $100 million. Spending on drugs and more people accessing health care benefits are the causes of the overage. Disaster expenses will flow through Agriculture and Forestry ($369 million) and Municipal Affairs ($647 million). Capital spending is slightly over-budget due to higher transportation and 2013 Flood expenditures. Debt servicing costs are expected to increase by $37 million to tip just over the $1 billion mark due to the larger deficit.
Financing Financial requirements remain formidable with $4.2 billion of additional debt issued to the end of June and borrowing of about $2.6 billion from the end of June to the date of the Update. The province expects to borrow for its different agencies, the capital plan, and the fiscal plan a total of $15.8 billion. Fortunately for Alberta, debt maturities requiring refinancing do not become problematic until 2019-20 when over $1.5 billion comes due.
Opinion The finances of the province remain highly challenging for the rookie government. Political opponents are demanding sharp cuts to spending. The Minister, his Premier and cabinet appear to be convinced that a policy of staying the course- maintaining public services at current levels and aggressively pursuing a capital spending program- will cushion the economy and prepare the province for a rebound in 2017. The verdict is still out. Yet as each month goes by, and government borrowing continues to be the main growth business in the province, the question of whether Keynesian magic and low interest rates will turn the tide, should be subject to robust debate.