Western Canada: As oil climbs higher, Alberta’s finances improve

Good morning. It’s James Keller in Calgary.

Alberta’s economy has been battered by years of economic decline in the fossil fuel sector, which began when oil prices crashed in 2014, setting off a recession. Things went from bad to worse when the COVID-19 pandemic hit in 2020, bringing the global economy to a halt and briefly sending oil prices into the negative.

That has led to years of persistent deficits, which reached new depths when COVID-19 eviscerated the province’s finances. Alberta finished 2020-21 with a $17-billion deficit, and the governing United Conservative Party’s promise to balance the budget in its first term suddenly seemed like a fantasy.

But then oil prices began to skyrocket last year, and everything changed. Alberta’s latest provincial budget, released this week, showed just how dramatically things had changed.

A projected $18.2-billion deficit for 2021-22, the fiscal year that is almost over, has been whittled down to an estimated $3.2-billion. And the deficit for the coming year, 2022-23, has evaporated. What was predicted a year ago to be an $11-billion shortfall has turned into a $511-million surplus.

It’s a remarkable turnaround in a province that has long been subject to the vagaries of oil and gas prices, for good or ill. And while the government argues that the return to balance has as much to do with its own fiscal restraint as it does with a new-found resource boom, there’s little doubt that the transformation of the past year was primarily driven by record revenues from resource royalties.

Still, the government’s push to hold the line on spending is another big story out of the budget. Even with the pandemic, the UCP government has kept spending increases below population growth and inflation, which has led to cuts and layoffs in various ministries. Year-over-year increases are expected to remain below 3 per cent for the next several years, with some ministries’ budgets essentially remaining flat or absorbing modest cuts.

Finance Minister Travis Toews says per capita government spending in Alberta will fall roughly in line with that of large provinces such as Ontario and British Columbia in the coming year, fulfilling the government’s goal for cutting spending.

The budget also includes some details on the government’s plan to shore up the health-care system to cope with the continued pressures of COVID-19 by building surgical capacity, paying for more procedures in private facilities to clear waiting lists, and adding intensive care beds. But the increased spending on health care, like other areas of the budget, is being kept below population growth and inflation as, in Mr. Toews’ words, the government seeks to make the system more efficient.

And while the government spent more than $6.5-billion on COVID-19 and emergency-related contingencies last year, the budget includes just $1.75-billion in contingencies for 2022-23, and of that, only $750-million is related to COVID-19. The government plans to use that COVID-19 contingency to, among other things, pay for the plan to deal with the surgery backlog.

Kelly Cryderman writes that for all the talk of diversification, the budget is a reminder that the province’s finances remain firmly in the grip of oil and gas: “The budget documents state that ‘due in large part to the role of resource revenue, Alberta revenue growth has been more than twice as volatile as Ontario, Quebec and British Columbia since 2000. This clearly makes government fiscal planning challenging.’ It’s a lament for what public servants in Alberta have and will contend with, for at least several more years.”

Patrick Brethour, The Globe’s tax and fiscal policy reporter, writes that the budget could also have a hidden upside. The government assumes West Texas Intermediate, the North American benchmark for oil prices, will average US$70 per barrel in the coming year. It’s currently trading at more than $90, with the war in Ukraine pushing prices even higher.

For every US$1 higher the price of oil goes above the government’s projections, the province expects to bring in another $500-million. That could translate into a significant surplus.

There is also the political reality for Premier Jason Kenney hanging over all of this. Mr. Kenney faces a leadership review in April, which the party was forced to call to quell internal revolt among caucus and party members.

Mr. Kenney will no doubt argue that the balanced budget shows his government is on the right track and that he should be given a chance to lead the party into the next election. Higher-than-expected surpluses could also allow the party to shower the province with spending ahead of the 2023 provincial election.

A potential risk for Mr. Kenney is that unemployed Albertans may not benefit from the high oil prices as they have in previous booms.

Experts and even the government have acknowledged that the oil sector is much leaner today than it was even a few years ago, and fewer workers are required to produce a barrel of oil. That means that many of the jobs lost during the past eight years may not return.

Paradoxically, several areas of the economy, including the oil and gas sector, face a labour shortage, because many of those unemployed workers don’t have the skills required to fill the open jobs. And in some cases, people who lost their jobs years ago have moved on — to other industries or to other provinces.

For more about what was in the budget, including a promised natural gas rebate that may leave some Albertans feeling underwhelmed, read my explainer here.

This is the weekly Western Canada newsletter written by B.C. Editor Wendy Cox and Alberta Bureau Chief James Keller. If you’re reading this on the web, or it was forwarded to you from someone else, you can sign up for it and all Globe newsletters here.