Alberta looks beyond oil as crash leaves balanced budget far off

By Kevin Orland on 3/23/2018

CALGARY (Bloomberg) -- Alberta is looking beyond its oil industry as it works to end years of red ink. Still, a recovery to balanced budgets is a long ways off.

Canada’s top oil-producing province on Thursday projected a narrower budget deficit next year, despite declining revenue from non-renewable resources. While it expects that revenue stream to rebound in future years, by the time the province returns to balanced budgets in six years, it will mark a smaller share of the government’s revenue than historical averages.

In its budget for the fiscal year ending in March 2019, Alberta doubled down on measures to wean the province’s economy off its dependence on oil and gas extraction after the recent downturn in the sector plunged the government’s finances into deficit. It’s extending a 30% tax credit for equity investments in certain Alberta businesses and a 10 percent tax credit for some capital spending in manufacturing, processing and tourism infrastructure.

“For too long, Alberta has been locked in a cycle of boom-and-bust spending that tracked the price of non-renewable resource spending,” Finance Minister Joe Ceci said in a prepared speech to the province’s legislature. The new budget is built to increase entrepreneurs’ access to capital, strengthen the technology sector and attract investment to the petrochemical industry, he said.

The government is pointing to growth in other parts of the economy as a sign that its efforts are gaining traction. Retail sales rose 7.5% last year, and manufacturing shipments increased 14%. Alberta led all provinces, with economic growth of 4.5% in 2017. The government is projecting 2.7% growth this year. Analysts surveyed by Bloomberg estimate 2.4% growth, second only to British Columbia.

Overall, the province projects its budget deficit will narrow to C$8.8 billion ($6.8 billion) in the fiscal year ending March 31, 2019. That’s down from C$9.1 billion in the current fiscal year. It’s also narrower than the C$9.7 billion the province estimated in its three-year plan released about a year ago.

Those projections include a 16% drop in resources revenue to C$3.8 billion as Alberta’s energy producers suffer from a shortage of pipeline space that has widened the discount for their crude compared to U.S. grades.

The government forecasts resource revenue will bounce back in the following year, but said that by the 2023-2024 fiscal year it will represent only 16% of total revenue. That’s below the 23% average over the last two decades and less than half of a high of 37% in the fiscal year ended in 2006.

The government sees the budget coming into balance in the fiscal year ending in March 2024, almost a decade after the oil crash pushed it into deficit. By the time it reaches balance, the C$56 billion in net debt the province has accumulated will represent about 12% of Alberta’s gross domestic product.

Other key budget details and projections released Thursday include:

Revenue will rise 2.1% to C$47.9 billion Expenses will rise 0.5% to C$56.2 billion. The government is allocating C$500 million for risk adjustment Revenue from personal income taxes will rise 4.9% to C$11.4 billion. Revenue from corporate income taxes will rise 18% to C$4.55 billion Debt-servicing costs will rise 42% to C$1.92 billion.

Key economic and energy-industry assumptions include:

The unemployment rate will drop 1 percentage point to 6.8%. West Texas Intermediate crude will average $59/bbl Western Canada Select crude will average C$46/bbl. Raw bitumen production will rise 11% to 3.16 MMbbl a day Non-oil sands crude output will increase 2.7% to 461,000 bpd. AECO natural gas will average C$2 per gigajoule Natural gas production will rise 3.1% to 4,500 Bcf.

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