SPECIAL REPORT

TD Economics
March 19, 2015

ALBERTA FISCAL OUTLOOK: SEIZING THE DAY TO SET

THE PROVINCE ON A STRONGER LONG-TERM FOOTING
Highlights
The drop in oil prices has created a sizeable fiscal gap in the Alberta fiscal plan. Current government
estimates peg the estimated shortfall at $7 billion in fiscal 2015-16. And, given the more subdued
outlook for oil prices, a structural deficit is projected in the absence of any policy action.
While the government has discussed a number of policy tools to address its fiscal challenge, a slash
and burn approach to achieving fiscal balance in quick time can be costly to the economy and does
not address current inefficiencies in program spending and an overreliance on non-renewable resource revenues. A more drawn out plan - with interim targets clearly mapped out - is likely the best
route for the government to take.
Given its current bind, the Province has an opportunity to put its finances on a stronger footing for
the longer term. In that vein, the forthcoming 10-year fiscal plan that will accompany Budget 2015 is
of equal importance. More notably, rather than depleting its resource endowment, the Alberta government needs to shift its longer-term attention on reducing its reliance on volatile non-renewable
resource revenues as a funding source for operating spending and, in turn, build savings for the
future.

The recent slide in oil prices has left governments in oil-producing regions scrambling to adjust their
fiscal plans. Alberta faces a particularly daunting challenge, with the news from the Premier that without
policy action the Province is on track to post a hefty budget shortfall of $7 billion next year. As such,
the government is currently mulling over choices to fill the budget gap. The spotlight has now shifted
to the March 26th budget, where key decisions will be unveiled.
The Alberta governments willingness to move sooner, rather than later, to tackle its fiscal challenge
should be applauded. If left alone, deficits will rise, necessitating the need for even harsher medicine
down the road. Many of the actions on the table are no doubt unappetizing, but the stakes are high. The
Province has an enormous opportunity to make changes that will put its finances on a stronger and more
stable longer-term track, hence helping to sustain its economic advantage over other jurisdictions.
While the strategies that Alberta undertakes will need to fit its unique circumstances, the government
can benefit from lessons of past deficit-cutting exercises both within the province and outside. In particular, certain strategies have proved more effective in delivering sustainable fiscal improvement. Setting
a clear and achievable deficit elimination timetable, favouring thoughtful program redesign over slash
and burn type strategies and focusing on tax reform (not just hikes) all deserve careful consideration.
Perhaps most importantly, rather than depleting its resource endowment, the Alberta government needs
to shift its longer-term attention on reducing its reliance on volatile non-renewable resource revenues
as a funding source for operating spending and, in turn, build savings for the future.
Derek Burleton, VP & Deputy Chief Economist, 416-982-2514
Jonathan Bendiner, Economist, 416-307-5968

www.td.com/economics
@CraigA_TD

TD Economics | www.td.com/economics

CHART 1: STATUS QUO FORECAST SHOWS

STRUCTURAL DEFICIT FOR ALBERTA

CHART 2: OIL PRICES TO RECOVER GRADUALLY

IN SECOND HALF OF 2015

US$/barrel

Surplus/Deficit, $ billions
2.0

120

1.0
0.0

Forecast

100

-1.0

80

-2.0
-3.0
-4.0
-5.0

60

AB

TD Economics

WTI

40

-6.0

WCS

-7.0
-8.0

20
13-14

14-15

15-16

16-17

17-18

18-19

2008

The Alberta government has been forthright in spelling

out the sizeable fiscal challenge that the province faces. Still,
any estimate of a status-quo shortfall is highly sensitive to
expectations on oil prices. While Albertans need to await
the upcoming budget for a more fulsome picture of the governments fiscal outlook, the government indicated that its
$7 billion estimated shortfall in fiscal 2015-16 hinges on a
WTI price that is forecast to average less than $US65 per
barrel. For fiscal 2016-17, a US$70 assumption is made,
bringing down the budget gap marginally to $6 billion1.
In contrast, TD Economics has adopted a below-consensus view on WTI prices for 2015 and into 2016, reflecting
our relatively bearish judgement on fundamentals within the
global oil market. More specifically, we expect WTI prices
to average only US$52 per barrel in fiscal 2015-16, before
rebounding to US$68 in fiscal 2016-17 and US$75 beyond
that point. The lower price forecast suggests that without
any actions, the budget shortfall could come in by as much
as $1 billion higher than the governments cited figure for
fiscal 2015-16.
Looking further out, although some of the gap would
automatically by addressed by a cyclical pickup in the
economy, crude oil prices and government revenue beginning in fiscal 2016-17 (see Charts 2 and 3), we estimate that
the Province would still be left with a persistent structural
deficit on the order of $4-$5 billion (or around 1.5% of
GDP). Borrowing related to fund these shortfalls would
transform Albertas current net asset position into a net debt
position by the next fiscal year and rise to as high as 7-8%
March 19, 2015

2010

2011

2012

2013

2014

2015

2016

Source: Bloomberg, Haver Analytics. Forecasts by TD Economics/TDSI as at

March 2015. * WCS Q1-2015 reflects price as of March 12, 2015.

Source: Alberta Government and TD Economics.

TD Economics estimates $4-5 billion structural

budget shortfall

2009

of GDP by fiscal 2018-19.

Challenging fiscal times not new for Alberta

While the associated levels of net debt would remain

very manageable and low when stacked up against other
jurisdictions, the government has made clear that it will
move swiftly to prevent this sort of fiscal deterioration from
materializing. And, the government has been conditioning
Albertans to brace themselves for significant spending cuts.
Indeed, the province has floated the idea of shaving as much
as 5% from departmental spending in the next fiscal year (or
9% in real per-capita terms)2. Revenue-raising measures will
also form part of the plan, although the government appears
to have ruled out the implementation of a provincial sales
tax. Another lever that is being contemplated is a move to
draw down assets, notably the estimated $6 billion currently
CHART 3: ECONOMIC GROWTH TO GAIN A STEP
FOLLOWING SOFT PATCH

% growth
8.0
6.0
4.0
2.0
0.0
-2.0

Nominal GDP

-4.0

Real GDP

-6.0
-8.0

2014

2015

2016

2017

2018

Estimate|Forecast by TD Economics as at March 2015.

TD Economics | www.td.com/economics

set aside in the provinces contingency fund3.

Taking on such a tall task head on is not new to Alberta.
The province has been home to large swings in economic
and fiscal fortunes in the past. In the early 1990s, deficit-toGDP ratio spiked to more than 4%. More recently, surpluses
of more than 4% of GDP evaporated and were transformed
into deficits of around 1% as oil prices collapsed following the Great Recession. However, just as quickly as oil
prices tumbled they rebounded, leading to a recent string
of surpluses. The province can benefit from these past experiences (and others in Canada over the past few decades)
as it sharpens its pencil ahead of the 2015 Budget. As the
government works through the details of its fiscal plan, there
are a number of approaches that merit close consideration.
Set a clear and achievable longer-term plan

The first step is to lay out a clear, multi-year plan. By

setting realistic targets, which includes the ongoing use of
contingency reserves to protect against nasty surprises, sets
the stage for the government to better those targets. A full
path to the final destination, including interim deficit goals,
needs to be provided up front. Fortunately, the government
has been adopting medium-term plans in recent budgets and
the Premier has indicated that a 10-year blueprint will be
included alongside Budget 2015.
While it will map out a decade long fiscal plan, a question
is still raised surrounding an optimal timetable for targeting
deficit elimination. In our view, given the sizeable structural
deficit, one year appears aggressive. Just as the government
in the 2000s fanned the cost bubble by injecting significant
new outlays when the economy was in excess demand,
drastically restraining spending during a cyclical low would
exacerbate near-term economic weakness. The government
estimates that a $4 billion reduction in government spending would reduce Albertas real GDP growth by 1%4. At
the same time, deficit-reduction plans that are too lengthy
increase vulnerability to unanticipated events that might
throw finances further off course. A balance in our view in
light of the current challenge is three to four years.
Avoid a slash and burn approach

The government has laid out a convincing case that

spending reductions should form a key part of the fiscal
repair. After years of rapid spending growth, program outlays on a per capita basis hover $1,300 higher per person
in Alberta compared to the national average. This higher
spending is not concentrated in one area, as per capita
March 19, 2015

spending in health, education and social services all exceed

the national average5.
Still, spending cuts must balance short-term fiscal objectives with longer-term sustainability. Across the board
spending reductions are more straightforward and can make
a quick dent in the deficit. Experience has shown, however,
that merely starving departments of funding misses the opportunity of securing longer-term savings. Pressures merely
build and must be addressed later. Ideally, the medium
term fiscal plan would target areas of government where
productivity is lowest, so the payoff would be highest. In
other words, a meticulous assessment of each ministry and
program with eyes focused on value for money needs to be
the mantra. Given the potential to reap efficiencies, alternative service delivery should be an important tool in the kit.
While no spending area is likely to be completely immune to restraint in the near term, there is a good case
to be made for maintaining infrastructure spending as a
key budget priority. Partly due to cash accounting rules,
Canadian governments in the 1990s slashed capital spending budgets disproportionately, which later manifested in
strained infrastructure systems in the 1990s. In this regard,
the Heritage Trust Fund provides a potential avenue for the
province to leverage off its savings and good credit rating to
continue with infrastructure investment in the coming years.
Infrastructure spending that passes the litmus test of adding
value could also provide a near-term lift to an economy that
is struggling. According to the IMF, a 1 percent of GDP
permanent increase in public investment increases output
by about 2 per cent in the same year6.
There are other key lessons that have been learned from
CHART 4: ALBERTA HAS FACED TOUGH FISCAL
TIMES BEFORE
Budgetary balance as a share of nominal GDP
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%

90-91

93-94

96-97

99-00

02-03

05-06

08-09

11-12

Source: 2014 Federal Fiscal Reference Tables and TD Economics.

TD Economics | www.td.com/economics

past deficit-cutting experiences. A province should be mindful not to simply pass the buck. For example, a number of
provincial governments in Canada have passed the onus of
spending reductions onto their municipal counterparts either
through cuts in transfer payments or increased responsibilities, which left these local jurisdictions in a difficult position. Another key lesson is that spending scrutiny should be
an ongoing process. In Canada, a number of governments
have conducted program spending reviews. But while these
reviews often generated short-term savings, once the initial
reductions were identified, the machinery was abandoned.
In Albertas context, the case for re-evaluating program
spending is particularly relevant. The province has recorded
rapid population growth, which adds to pressure on government spending. Over the next few years, trend population
growth is likely to slow, as the province experiences a
dramatic reduction in interprovincial migrants. But this
slowdown is likely to be only temporary in our view, as
the economy likely regains its status as the fastest growing
province over the longer haul. Whats more, given the aging
of the population, health care pressures remain an enormous
challenge facing Alberta and other provincial governments.
Hence, any efforts to target improved long-run efficiencies
must not leave health care off the table.
Perhaps most importantly, as we argue in the final section, Alberta needs to wean itself off volatile non-renewable
resources (NRR) as a key source of funding for operating
spending over the long run. To the extent that removing
NRR lowers the revenue take, even more emphasis will be
needed on creating a more efficient government.

CHART 5: POPULATION GROWTH IN ALBERTA

OUTSTRIPPING NATIONAL AVERAGE
% growth, population, nsa
3.5

Alberta

3.0

Canada

2.5
2.0
1.5
1.0
0.5
0.0

2002

2004

2006

2008

2010

2012

2014

Source: Haver Analytics.

As part of any spending review exercise, Alberta should

go through its inventory of assets in order to identify areas where it makes sense to exit the business altogether.
However, a government decision to divest assets in order
to achieve their short-term fiscal goals alone can be problematic. Not only do asset sales only provide a one-time
boost to revenues, but any windfall generated may merely
represent the present value of future income stream that
would have flowed into government coffers anyway. Thus,
assets should only be sold if efficiency gains can be realized
or if privatization can unleash some value that is currently
being held under public control. Given the thirst for a steady
yield in todays market, the valuations on public assets might
increase the economic case for asset sales.

The Alberta government has indicated that tax increases

are being contemplated as part of the deficit-elimination
strategy. There certainly appears scope to raise tax rates
and stay competitive within the North American market.
Indeed, owing to its significant intake of NRR, the province
currently enjoys the lowest tax burden among the provinces
and among the lowest in North America7. According to the
government, if the Province levied tax rates in line with
other jurisdictions in Canada, Albertas individuals and
businesses would pay at least $12 billion more in taxes each
year. About half of this advantage reflects the fact there is
no provincial sales tax (PST) in Alberta8, although a direct
implication is that the provinces tax base is relatively more
reliant on income taxes than other jurisdictions.
Regardless, the focus should not be on tax hikes per
se but on reforms that improve the competitiveness of the
Alberta economy over the long run. As we show in Table
1, taxes on capital and income impose the largest negative
impact on economic growth, while consumption-based
taxes such as a value-added PST or user fees are the
least distortionary. By closing the door on the introduction
of a PST, the government is missing an opportunity in our
view. On a positive note, there still appears to be potential
to improve the tax system through other avenues. Consider
the provinces 10% flat tax on personal income, which is
the only non-progressive tax system in Canada. Yet there
is a growing wave of international research that supports
the notion that more progressive PIT systems lower income
inequality and thus lead to stronger economic growth over
the long run9.

Focus on tax reforms not tax hikes

Less reliance on oil royalty revenues should be a

Avoid selling assets purely for fiscal reasons

March 19, 2015

TD Economics | www.td.com/economics

Table 1: Impact of Revenue Equivalent Tax Initiatives on Welfare and Steady State GDP
Percentage change in
Welfare loss (in dollars) per
steady state GDP for an ex
dollar of gained present
ante 1%-of-GDP increase in
value government revenue
government revenue
Decrease in capital cost allowances on new capital
A rise in personal capital income taxes
A rise in sales taxes on capital goods
A rise in corporate income taxes
A rise in personal income taxes
A rise in payroll taxes
A rise in consumption taxes
Source: Federal Department of Finance, 2004.

long term goal

The sizeable fiscal gap will only increase the temptation

to tap the provinces large endowment of financial assets that
have accumulated further in recent years through budget
surpluses and solid NRR intake. Still, there appears to be
little appetite for the government to sell assets within the $17
billion Heritage Trust Fund to lower the deficit. Less clear
is the governments intentions with respect to the $6 billion
currently set aside in the governments contingency account.
This account, which replaced the previous sustainability
fund, was created through the Fiscal Management Act to
provide short term fiscal stabilization. However, government
policy dictates that the contingency account maintains a targeted balance of 15% of the provinces operational revenues.
As such, with the current balance in the fund at around $6
billion, only some $800 million can be drawn down from
the fund in fiscal 2015-16. While a change in policy could
allow more of the account proceeds to deficit reduction, these
funds would only provide a one-time benefit to coffers and
do little to arrest the structural budget shortfall.
Regardless, the focus of discussion needs to shift away
from any notion of divesting financial assets to building
savings. This would involve a longer-term plan to reduce
(or even eliminate) reliance on NRR to fund annual operating spending and, instead, sock it away to the future benefit
of Albertans. Over the past ten years, NRR has accounted
for around 30% of total government revenues on average
(and this does not take into account corporate tax revenue
sourced for the oil and gas sector). This high dependency
on a revenue source that can be subject to wild swings has

March 19, 2015

-1.35
-1.30
-1.29
-0.37
-0.32
-0.15
-0.13

-4.39
-3.36
-3.05
-1.94
-1.29
-0.66
-0.19

translated to increased volatility in Albertas own source

revenues. The government estimates that Albertas own
source revenues are around 50% more volatile than the
average across other regions10.
Reducing reliance on NRR could be considered as part of
a longer term fiscal plan. And, the governments forthcoming
10-year fiscal plan provides a good opportunity on this front.
Ideally, any resource royalties could be fed directly into the
Heritage Fund and saved for future generations. Currently,
the Heritage Fund is only legislated to receive a small portion of resource revenues based on an upward sliding scale
on the amount of NRR receipts (prior to the contingency
account reaching the $5 billion threshold, NRR were first
dedicated towards the contingency fund). Beginning in fiscal
2017-18, 100% of net investment income earned from the
Fund will be retained. Until such date, only a portion of the
Funds income to cover inflation is required to be saved.
The remaining income gains are deposited into the General
Revenue Fund to help fund existing programs and services11.
A re-structured fiscal plan that is not as reliant on NRR
would lead to less volatility and budget cycles would be
more muted. However, if the government moves to remove
up to $7-8 billion from use to save for the future, it must
replace this with either lower trend spending or higher taxes.
Bottom Line

Budget 2015 will provide a major opportunity to set the

provinces finances on a more sustainable path. We hope
that the government seizes the moment.

TD Economics | www.td.com/economics
End Notes
1. Rotary Club of Edmonton: Pre-Budget Address, Government of Alberta, March 2, 2015.
2. https://soundcloud.com/your-alberta/premier-prentice-and-minister-campbell-media-scrum-feb-11-2015.
3. http://www.cbc.ca/news/canada/edmonton/alberta-s-projected-surplus-could-vanish-in-a-heartbeat-finance-minister-1.2971540
4. Backgrounder on Albertas Fiscal Situation, Government of Alberta, January 15, 2015.
5. Ibid.
6. World Economic Outlook: Legacies, Clouds and Uncertainties, International Monetary Fund, October 2014.
7. http://finance.alberta.ca/business/tax_rebates/
8. Backgrounder on Albertas Fiscal Situation, Government of Alberta, January 15, 2015.
9. Alexander, Craig and Fong, Francis, The Case for Leaning Against Income Inequality in Canada, TD Economics, November 24, 2014.
10. Backgrounder on Albertas Fiscal Situation, Government of Alberta, January 15, 2015.
11. Ibid.

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March 19, 2015