Toews shakes hands with Alberta Premier Danielle Smith after he was sworn into cabinet as President of Treasury Board and Minister of Finance in Edmonton, on Oct. 24, 2022.JASON FRANSON/The Canadian Press
Travis Toews has had to respond to several gloomy credit downgrades during his years as Finance Minister. So there’s good reason he called it “wonderful news” that Moody’s Investors Service upgraded Alberta’s long-term debt rating.
In short, the credit rating agency said this week it thinks the province is likely to be okay financially well into the 2020s. That’s speaking with as much certainty as you can about a provincial government still dependent on volatile oil revenues to pay for all manner of public services.
“The credit risks facing Alberta have decreased, and the improved risk profile could be sustained over the next 3-4 years,” Moody’s said in its report this week. “While Alberta continues to face volatility in revenues from oil prices, the sustained high oil prices above pre-pandemic levels have changed the fiscal trajectory of the province towards ongoing surpluses.”
Now – one month away from the province’s 2023-24 budget on Feb. 28 – the question is whether the province does more of the work to balance the books in the longer term. And one risk to Alberta’s currently strong fiscal situation is the potential for United Conservative Party spending promises ahead of a May election.
The bad fiscal times for the province began shortly after the oil price crash of 2014. The onset of the pandemic in 2020 drove oil prices to historic lows and made the province’s financial situation even worse. Then, Alberta’s budget position improved in late 2021, when commodity prices jumped. At the same time, oil sands projects hit a point of maturity where royalty revenues to the government spike. The start to credit rating agency upgrades began last year.
The Moody’s report this week upgraded the Province of Alberta’s long-term debt ratings to Aa2 from Aa3. It means the province is seen as less likely to default on its debt obligations. This rating is not only a boost to the province’s fiscal reputation but also allows the province to borrow money at a lower cost.
Revenue growth will moderate in 2023 and 2024 relative to the strong growth in the past two years, the Moody’s report said, but levels will remain sufficient to offset inflationary expense pressures, meaning a continuation of surpluses. Despite oil prices falling from the mid-2022 highs, oil-related revenues will contribute an estimated 30 per cent of total revenue in the 2022-23 fiscal year. Although Mr. Toews and other members of the UCP have highlighted their work to bring costs down, the forecast of higher oil prices in the years ahead is what counts in the Moody’s report.
But it’s not all oil: “The oil price dynamics also coincide with overall improving economic conditions in the province, with real GDP growth estimated to exceed the Canadian growth rate which Moody’s projects at 3.3 per cent in 2022 and 0.6 per cent in 2023, as business and consumer spending increase leading to rising tax and other revenues.”
Moody’s now projects Alberta’s debt burden will fall to prepandemic levels. This upgrade also takes Alberta’s credit risk rating back to where the province was just before the pandemic hit. Two years ago, the outlook was grim. It was forecast Alberta would have about $120-billion in debt by now. Instead, the government is focused on repaying maturing debt obligations, bringing the debt down to just less than $80-billion.
The credit rating agency also notes the province’s tax regime is highly competitive relative to most provincial peers, given a lack of sales tax and lower corporate and personal income tax rates. It said Alberta holds more wealth than other provinces – including in the Heritage Savings Trust Fund – but is also more susceptible to carbon transition risk.
The report, of course, speaks to the eternal question for Alberta: When is it all going to end? Continued reliance on a volatile non-renewable resource “exposes the province to significant swings in its fiscal results. In Moody’s view, this is one of the key credit challenges facing the province.” Skeptics of federalism should also note that “Alberta’s credit profile also benefits from a system of highly predictable fiscal transfers from the federal government, including health and social transfers based on pre-determined escalators.”
Even beyond the province’s heavy reliance on oil revenues, there’s a long list of confounding goings-on that could throw off any government in 2023. The world is bracing for a recession induced by higher interest rates that central banks have used as their main tool to tame inflation. In Calgary, where investors have come to buy affordable real estate, the unemployment rate is still a relatively high 6.6 per cent – even as workers in specific sectors are scarce.
One thing is sure: This UCP government can no longer legitimately blame the province’s fiscal problems on the NDP government of 2015-19, as it has done in the past. By now, everything lands squarely on their shoulders.
The UCP will, however, still campaign on the premise that electing an NDP government will lead to a spending binge. The Smith government wants to hold onto its rep for being more fiscally disciplined than the NDP, especially as interest rates rise.
But as the province draws nearer to the campaign period, the desire to announce things – all of them costing money – will be strong.
In the fiscal update in November, Danielle Smith’s government said the Heritage Fund would not get all of the near-$3-billion boost promised by the Kenney government in the summertime. There was also $2.5-billion in increased spending announced. About $1.3-billion of that will be used for inflation-relief measures, including $100-a-month payments going to most Alberta seniors and families with children.
When Ms. Smith announced these measures, she also promised “these are just first steps.” Inflationary pressure is a real and pressing problem for most people. New spending on health care and other priority areas will be needed. But Albertans also should be on alert for politically driven inducements from the governing UCP, couched as affordability payments.