Ottawa – After six years in the red, Alberta is expected to balance its books in 2014-15, according to The Conference Board of Canada's Alberta Fiscal Snapshot: Promising (But Potentially Risky) Prospects.
“Overall, Alberta is in a very sound position and our forecast for Alberta is even more optimistic than the government's own budget projections, thanks to an expectation of higher resource revenues,” said Matthew Stewart, associate director, Canadian Outlook.
“Perhaps the greatest risk to Alberta's future is its high reliance on royalty revenues to fund program spending. Funding so much of its operating expenditures with resource revenue helps to keep provincial tax rates low. But a large decline in royalties, such as what occurred in 2008-09, would make achieving and maintaining a balanced budget much harder.”
Economic growth in Alberta is expected to be the strongest in the country in 2014 and 2015. Real GDP will rise by 3.5% in 2014 and by 3.1% in 2015. Strong economic growth will continue to fuel gains in employment and income, further increasing the government’s tax base.
As a consequence, Alberta is one of the few provinces set to have balanced books in 2014-15, along with BC and Saskatchewan. In addition, Alberta is the only province with a net surplus of financial assets. This implies that interest payments on debt will be negligible over the forecast period – a feat that no other province will accomplish.
Risks still seen
While the Conference Board is projecting annual surpluses for three years starting in 2014-15, there are risks to the outlook: the potential constraints on economic growth if pipeline development stalls and the ability to limit growth in health care spending.
Alberta Finance forecasts average annual revenue growth of 2.9% over the next three years. Alberta will also benefit from changes in the formula for calculating the Canada Health Transfer (CHT) to provide funding on a per-capita basis – resulting in an annual 20% increase in health transfers between 2014-15 and 2016-17.
Restraining program spending growth is also present in Alberta's budget plan – with average annual spending essentially flat over the next three years. The province's program spending increased by an annual average of 7.6% over past 10 years. Alberta is the third-highest per capita spender on health care among the provinces, and per-student education costs are also above the provincial average.
Alberta indicated its intention to limit growth in health care expenditures to an average annual rate of 3.2% over the next three fiscal years (health care spending averaged growth of 8.8% in the previous 10 years). The Conference Board of Canada projects that health spending would need to average 4.2% annually to accommodate just population growth and inflation.
The Conference Board's forecast for oil prices and production is higher than that of provincial government. As a result, royalty revenues are expected to be higher than forecast by Alberta. By 2016-17, royalties are projected to provide $2.6 billion more in provincial revenue than forecast in the 2014 budget.
Pipelines have become a hot-button issue across North America, with uncertainty surrounding the fate of the Keystone XL and Northern Gateway projects. Alberta cannot fully realize the potential value of the oil sands without additional pipeline capacity becoming available sometime in the next five to 10 years.