Third Quarter Fiscal Update

Green shoots- still clouds on horizon

Treasury Board President and Finance Minister, Joe Ceci released the Government of Alberta’s Third Quarter Fiscal Update and Economic Statement on Thursday 23 February 2017. Overall the fiscal picture has not changed very much over the past three months. The 2017-18 budget is expected to be in March and will likely reflect some tweaks to the fiscal 2017 numbers published today.

There is definitely some more optimism in Alberta today as oil prices have stabilized, pipeline approvals announced, and Fort McMurray rebuilds. Possibly the worst is behind the economy but there is little reason to be complacent. Today Mr. Ceci announced the passage of an Order in Council authorizing the borrowing of up to $14 billion. He immediately cautioned that this approval is consistent with the budget plan. His departmental officials have been rather busy borrowing this year. Compared to an estimate of $5.2 billion in borrowing to this point, his department has brought in nearly $12 billion. This strategy appears to be both strategic and opportunistic given that long-term rates in the U.S. are rising which is a vast pool of capital the province has tapped and aims to tap in the future.  While the Bank of Canada has paused on bumping short-term rates, long-term rates are rising in this country along with the rest of the world.

Financing requirements for Alberta Treasury Branches are $750 million below those anticipated last April suggesting that ATB’s deposit-taking capacity has improved over the past nine months.

The expected deficit for the fiscal year ending 31 March 2017 is now estimated at $10.8 billion, up $444 million from the April 2016 budget.  On the revenue side, the notable changes include a $981 million drop in expected corporate income tax. This drop presumably reflects the combination of losses in the oilpatch and some movement of corporate income out from the province as rates rose to 12 per cent from 10 per cent. Personal income tax is flat suggesting the economy is stabilizing. Non-renewable resource revenue increased by $1.1 billion due to higher bitumen and crude oil royalties.  The total take of $2.4 billion is still expected to be around $$00 million less than last fiscal year and well below historical levels. On the positive side contributions from the federal government were $664 million higher than estimated mainly due to the Fort McMurray fire and offset extraordinary expenditures this year. Another pleasant surprise is higher expected investment income from the Heritage Fund ($691 million) and Endowment funds ($94 million) as a result of rising stock markets.

Operating spending is forecast to be $1.8 billion higher than budgeted.  These deviations are in the health care area ($284 million) and $1.1 billion from an accounting adjustment recognizing the agreements to pay electricity generators $97 million per annum for 14 years to transition away from coal. The provision takes the net present value of the payments and books them in 2016-17. Other expenditure increases were for income support, child intervention and people with disabilities programs and school enrollment growth.

Capital spending which was budgeted at $8.5 billion is forecast to come in at $7.3 billion. The principal causes are due to “project re-profiling due mainly to
project progress, the Wood Buffalo wildfire, adverse weather and other factors.”

The economic outlook is cautiously optimistic suggesting real GDP will grow by 2.4 per  cent in 2017 due to higher oil and bitumen production, improved drilling activity, and the Fort McMurray re-build. Nevertheless, construction is forecast to be muted as major private sector projects wrap up and residential housing starts remain weak except in Wood Buffalo area. Another continuing drag are lower corporate profits and slower population growth.

The Update does not alter the fact that the provincial government’s finances have deteriorated seriously over the past five years. The Minister was pressed this afternoon on the issue of how the government would respond to public sector unions in upcoming negotiations. The Minister naturally demurred as this remit is a sensitive one given the base of the governing party. He again stressed the goal of the government in protecting Albertans from the ill effects of the economic downturn. Announcements about provincial agency restructuring are expected in a few days. Executive pay at provincial agencies should also be examined as growing income inequality is, or should be, an important issue for the young social democratic government.

The main clouds that overhang the economy is the weak employment picture with a recent survey on oilpatch employment suggesting companies will not be hiring back large numbers of workers {oil-industry-likely-faces-jobless-recovery-study23}-2-17-ej}. The rise in resource revenue, while positive, illustrates how deep in the fiscal hole the province is in. With a deficit of $10 billion, even gains of $3-$4 billion in resource revenue will not bring a balanced budget nearer without either a harmonized sales tax or public sector restructuring and continuing salary restraint. Another structural weakness in the budget is the volatility of investment income reflecting the structure of the Heritage and endowment funds and accounting policies requiring the value of securities’ holdings be “marked to market.”  Increased volatility in not something the provincial government needs at this time.

Much uncertainty still surrounds the Alberta economy and provincial budget.

Alberta fiscal plan unlikely to cut deficit16-3-17 GM

NDP budget has cash for 10 new schools16-3-17 EJ

New hospital to be built in Edmonton16-3-17 EJ

Wildrose urges ‘fiscal Dragon’s Den’ to find savings16-3-17 EJ

Ceci does little to quell D-word15-3-17 EJ

NDP budget offers hope- and ammunition for opposition11-3-17 GM

Red Deer Hospital pain felt all across Alberta11-3-17 EJ

Ceci hoping for big savings9-3-17 EJ

Notley resolute on carbon tax depsite ‘uncertainty’ down south9-3-17 EJ

Union members ratify deal with AHS8-3-17 EJ

alberta-book-publsihers-seeking-15m-in-funding25-2-17-ej

sluggish-capital-spending-dampens-ndp-momentum24-2-17-ej

were-not-out-of-the-woods-yet-far-from-it-ceci-says24-2-17-ej

climate-change-policies-add-1-billion-to-alberta-expenses24-2-17-gm

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