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Alberta forecasts smaller surplus as Danielle Smith opts to spend some of the oil windfall

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danielle-smith-2-1125

Alberta is on track to record a surplus this year of $12.3 billion, down from its previous forecast of $13.2 billion, following a softening in energy prices and a large package of new spending initiatives aimed at cushioning the blow of high inflation on the province’s families and seniors.

In its mid-year fiscal update, the province said non-renewable resource revenue — including $19.4 billion in bitumen royalties — continue to buoy its coffers, handily exceeding the contributions from corporate and personal income taxes.

Tight global energy supplies and Russia’s invasion of Ukraine continue to sustain energy prices, despite recent volatility that has pushed oil prices lower for three consecutive weeks. The province said Nov. 24 that it now expects resource revenue will decrease next year by almost $9 billion. Alberta predicts benchmark West Texas Intermediate (WTI) crude will finish the fiscal year at US$91.50 per barrel (bbl), but will slide to US$78.50/bbl in the fiscal year ending March 31, 2024 and US$73.50/bbl the following year.

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“Alberta continues to have economic momentum despite global uncertainty,” Finance Minister Travis Toews said at a press conference. “Our fiscal situation has improved substantially since Budget 2022,” he said, noting that the $76.9 billion revenue that he now expects is more than $14 billion more than he foresaw when he tabled this year’s budget in the spring.

Expenses, however, have increased as well.

According to the province’s second-quarter report, expenses are $2.5 billion higher than estimated in the original budget — and more than half of that increase will go towards Premier Danielle Smith’s recently announced inflation relief package.

In a TV address to Albertans earlier this week, Smith announced $2.8 billion over three years to address affordability concerns, including fuel tax relief, electricity rebates, natural gas consumer protection, indexation of personal income taxes and means-tested payments to families and seniors.

Almost half of the money is scheduled to be spent this year.

The fiscal update shows that Smith’s government cut the amount it had previously pledged to sock away in the Heritage Savings Trust Fund, the province’s main long-term savings fund, from the $3 billion announced in the last quarterly update, to $1.2 billion.

Toews downplayed the move, arguing the province had not traded long-term savings for short-term inflation relief. He said the province expects to have $5.8 billion in surplus cash by March 31, 2023, for debt repayment, savings or other infrastructure priorities.

“No, we’ve not taken that off the books,” Toews said in response to a question about the decreased allocation to the Heritage Savings Trust Fund. “We’ve deferred that decision to fit into our plan around the fiscal framework going forward.”

Alberta will still pay down significant debt this year. The forecasted $13.4 billion in debt repayment for 2022-23 is the single largest such payment in the province’s history.

The province’s New Democratic Party, the official Opposition, criticized the decision to defer allocations to the Heritage Savings Trust Fund and accused the government of failing to help Albertans with meaningful supports for rising utility and grocery costs. “This is how you piss away a boom,” NDP finance critic Shannon Phillips said at a press conference.

While economists have praised the province for prioritizing debt repayment as interest rates rise, the province’s decision to deviate from its previously planned allocations to the Heritage Savings Trust Fund is attracting some scrutiny.

“Circumstances have changed somewhat,” said University of Calgary economist Trevor Tombe in an interview, pointing to the drop in oil prices and Smith’s new affordability measures as factors that have eaten into the pool of available funds for debt repayment and long-term savings.

“But they still had the $5.8 billion in unallocated cash now leftover, they still could have made the (full) contribution to the (Heritage) fund. So I can only assume that there’s some internal discussions around whether contributing more to the fund is the best use of these dollars.”

Some analysts speculate the province could be tempted to use unallocated cash for additional inflation protective measures or debt reduction.

In a research note Friday, Laurentian Bank economist Sébastien Lavoie said Alberta and Quebec have implemented more measures aimed at shielding citizens from inflation than other provinces and territories.

Lavoie credited Alberta with posting a “gargantuan” surplus this year, but warned that a recession could curb future economic growth. Government growth projections for real GDP and employment over the next three years are already on average one per cent higher than private sector forecasts, he said.

“The global economic environment, and near-term fiscal trends on both revenue and spending sides, could be materially different when the next provincial general election is held on May 29th, 2023,” Lavoie wrote.

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