Alberta government adjusts expectations, spending because of lower revenues in first quarter fiscal update

Click to play video 'Lower than expected revenues forces Alberta government to tweak fiscal plan' Lower than expected revenues forces Alberta government to tweak fiscal plan
WATCH ABOVE: Alberta's finance minister says oil prices and government revenues are now forecast to be lower than initially projected. Quinn Ohler reports on how the province is planning to address that – Aug 23, 2017

While there have been signs of an economic recovery in Alberta, the provincial government is adjusting its expectations and trimming its spending plans as it grapples with less revenue than it had forecast for the 2017-18 budget. However, the province is still expected to run a deficit in excess of $10 billion in 2017-18.

“There is good reason to feel optimistic about Alberta’s recovery and we will continue on the path to balance while supporting the needs of everyday Albertans,” said Finance Minister Joe Ceci.

READ MORE: Alberta NDP tables fingers-crossed budget, projects $10.3-billion deficit

The province has made a dramatic shift in its forecast for non-renewable resource revenue, saying oil prices have not met budget expectations.

In March, Alberta anticipated West Texas Intermediate Crude (WTI) would be worth US$55 per barrel. That outlook is now adjusted to US$49 a barrel.

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“The forecast in March was based on the best private sector forecasts available,” said Ceci. “The same is true of the updated forecast.”

Overall, projected revenue from all non-renewable resources has declined by $377 million to $3.4 billion. Half of the government’s $500 million budgeted risk adjustment is being used in the first quarter to offset the decline.

“The risk adjustment monies is being used as we intended it to be used,” Ceci said. “We’re prudently only using half of that now.”

“Given how important oil prices are to Alberta’s budget, that volatility requires us to build in protections against these kinds of fluctuations so that we can meet our targets.”

Despite lower prices, the province said drilling activity has been strong so far this year, with the number of rigs and metres drilled having doubled from 2016-17 levels.

READ MORE: Could Alberta’s oil industry be rebounding?

A strengthening Canadian dollar is also shouldering some of the blame for lower revenue as the forecasted exchange rate moves up a penny to 77 cents U.S. According to the 2017-18 budget’s economic assumptions, a one cent increase was estimated to cost Alberta $215 million in revenue.

In the first seven months of 2017, 17,000 new jobs were added in the province. The government now believes employment will increase by 1.3 per cent this year, up from the earlier forecast of 0.9 per cent.

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Adjustments for income tax transfers from Ottawa and what the province calls the “lingering effects of the economic downturn” have the provincial estimates for revenue, from personal income tax, down by $312 million. Average weekly earnings have also not increased from 2016 levels.

The province has also estimated a $69 million reduction in revenue from tobacco taxes, which it said can be attributed to less consumption of tobacco products and possibly an increase in the use of e-cigarettes and other vaping products.

“People are spending less of their discretionary [income] on things like that,” said Ceci. “Vaping taxation is something that is on radars, not a great deal on my radar, but it’s something we’ve talked about at the [federal, provincial, territorial finance minister] meetings.”

READ MORE: Smokeless cigarettes: are they really less harmful than traditional cigarettes?

Lower revenue means less spending is planned for 2017-18.  With a nearly $400 million dollar reduction in the province’s capital plan, a number of education and health projects slated to receive funding this year will be deferred to later years.

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In addition, government departments already tasked with finding $200 million in efficiencies will need to find double that amount in areas where they can reduce spending, but didn’t provide specific examples of where those cuts could happen.

“You can’t just do that with the stroke of a pen. You need to do that in a thoughtful way,” said Ceci.

UCP finance critic Ric McIver was critical of Ceci’s reluctance to give more details on where the additional cuts would be found.

“When pressed, he gave the example of one $5 million reduction,” said McIver. “When pressed further, he said we’ve only really found $100 million of the first two hundred million, and couldn’t give any details on that.”

“We are confident we can find [the savings] internally,” said Ceci.

“It’s something that takes time and effort to work at shaving, downsizing, consolidating and being more efficient.”

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“To boldly stand here today and say he’ll definitely get to $400 million [in savings], well, I wish him well in that. He hasn’t got a ton of credibility on that,” McIver said.”

Despite the cuts in spending, the government is still on track for a deficit in excess of $10 billion.

“Our plan is clear and it is working. We will reduce the deficit over time by restraining growth in spending while protecting health care, education and the other services Albertans count on,” said Ceci.

Initially, the deficit had been pegged at $10.3 billion, but the number has now been restated as $10.5 billion after accounting adjustments were made following the release of the 2017-18 budget.