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Provincial Budgets in Alberta: Managing Great Expectations

Posted July 1st, 2012 in Alberta Politics, Alberta Provincial Budget, News and tagged by Marc Henry

Crafting provincial budgets in Alberta is more challenging than one might think.  We have resource wealth, no doubt, but it is revenue prone to wild fluctuation.  The Government must not only manage the dollars and cents of the budget, but the public expectations that come with being as financially fortunate (and sometimes unfortunate) as we are.  And Governments who lose sight of this can run into trouble.


An example of poorly managed expectations: Don Getty. His Finance Minister over-estimated the price of oil (by nearly double) in order to try to make the Province’s books balance.  They didn’t (by a long shot) and Getty ultimately paid the price for it.


An example of well managed expectations: Ralph Klein.  Most of the budgets during his term as Premier were very conservative in estimating resource revenues as part of the core budget, instead recording unbudgeted surpluses at fiscal year-end (some which were absolutely massive).


A little bit of historical context as we fast forward to today.  According to a ThinkHQ Public Opinion survey of 1038 Albertans in late June, the economic mood in Alberta is thoroughly bullish.


Fully 91% of Albertans characterize our provincial economy as strong (27% say very strong).  The same percentage say that over the next year, the economy of Alberta will stay this way (45%) or get even better (46%).  Over 8-in-10 Albertans believe that their personal financial situation is going to improve over the next 12 months.


2011-12 was a pretty good year in Alberta; a really good year according to the Provincial balance sheet.  The Province posted record revenues of $39.2 Billion, and the books were “essentially balanced”.  And if 2011 was a good year, most Albertans seem to believe that 2012 will be even better.


But the Provincial balance sheet doesn’t paint the same rosy picture.  In fact, in budget year 2012-13 it projects a $900 Million operating deficit.  And that figure isn’t for lack of optimism.  Quite the contrary, the Provincial Budget assumes oil prices will average $US99.25 /bbl, but the price of WTI (West Texas Intermediate) in June fluctuated in the high $70s – mid/low $80s.


That’s big money – every $1US drop in the price averaged over the course of a year costs the Provincial Treasury almost a quarter of a Billion dollars.  If oil actually averaged $85/bbl over the next fiscal year, we’d be looking at a $3.2 Billion deficit on top of $900 Million already budgeted.  $4 Billion represents 10% of the entire Provincial Budget.


Revenue problem, spending problem, call it what you want – but there is troubling brewing with the Provincial books, and it may not be a short-term problem.  According to a resource futures analysis conducted by the U of A’s Dr. Andrew Leach, the discrepancy carries through the three-year provincial financial plan.  On February 9th, Leach noted, “…the government is too optimistic about oil…Bottom line is a potential $2 – 3 Billion per year discrepancy, if the market is right about future prices.”


Is panic setting in at this point?  No.  In 2003, the Provincial Government created the Sustainability Fund.  This was to be Alberta’s rainy-day account to be used as a shock absorber during times when bust replaces boom temporarily.


We’ve been making good use of it.  The value of the fund peaked at about $15 Billion in 2009-10, and as of March 31st of this year, it sits about one-half of its high water mark.


So could Alberta weather a $4 Billion deficit this year?  The answer is yes, but with a short-fall of that magnitude, along with budgeted capital expenditures from the Sustainability Fund, the answer is “yes, but just barely”.


But the specter of this scenario raises some interesting questions.


Should the government be budgeting to draw almost a Billion dollars from the Provincial “rainy day” fund, when according to most Albertans, its not raining anymore?


Even more troubling, given the fragile nature of the world economy today, what do we do if another world-wide recession sends us scrambling to access an emergency fund which is almost tapped out?


Which is really the heart of the matter. Has the definition of the Sustainability Fund changed?  Is it still an emergency fund or has it morphed into a pool of savings designed to allow government spending to grow beyond revenues until surpluses from the next boom replenish it?


If Dr. Leach’s forecast is correct, the gap between what the budget is predicting and what the oil market will deliver is unlikely to close within this three-year budget cycle.  So at some point in the next two and a half years, something’s gotta give.


And for most Albertans, that “give” isn’t them giving more taxes or the Province “giving” themselves an expanded deficit.  Indeed, when asked what the Province should do if the budget shortfall is bigger than expected this year, over four-in-ten (45%) say cut spending/services, 13% prefer raising taxes, 21% say tap into the Heritage Fund if necessary, and only 7% opt for going deeper into deficit or debt.  The rest weren’t sure.


This will be a thorny issue for Alison Redford’s government in the coming months and years – the first quarter fiscal update will likely be released within weeks of the next sitting of the Legislature.


If oil prices continue to lag behind predictions, the Province will not only need to find the means to fill the gap, they will need to clearly define the course ahead if oil doesn’t reach $108/bbl by 2014-15 as planned.  And that course has certain political limitations as far as many Albertans are concerned.


In short, they will need to set expectations.  And with Alberta budgets, sometimes that can be as difficult as convincing people it’s raining on a sunny day.


Marc Henry is president of ThinkHQ Public Affairs Inc., an Alberta-based government and public relations strategy and public opinion research firm.