Alberta's New Democrats are looking at rewriting the province's balanced-budget legislation at a time when mounting deficits and a large infrastructure program expected this fall could add billions in red ink to the once debt-free province.
It's the latest break with the past as the NDP government begins to leave its mark on an Alberta that had been run by the Progressive Conservatives for 44-years. Corporate and income taxes were raised for the first time in decades, erasing more of the so-called Alberta Advantage once trumpeted by former premier Ralph Klein. In a philosophical twist, the New Democrats have turned their backs on certain pipeline projects while vowing to be leaders in climate change.
Finance Minister Joe Ceci is expected to table a budget in late October with a deficit that could reach $6.5-billion – the largest in decades. While Premier Rachel Notley's NDP ran on a platform that promised a return to balanced budgets by 2018, she's backed away from that commitment in recent weeks.
The province's Fiscal Management Act, the latest in a string of balanced-budget laws, requires any government shortfall to be matched by money drawn from Alberta's contingency account. Once that account is dry, the provincial government is barred from running a deficit. Before the latest collapse in oil prices, that account was expected to be drawn down to $3.5-billion by the end of March, 2016.
"We'll be putting our stamp on the Fiscal Management Act," Mr. Ceci's office wrote in an e-mail to The Globe and Mail about the government's ongoing discussions surrounding its fiscal plan. "There's a number of items we're looking at, including that section."
Based on current revenue projections and NDP spending promises, it is unlikely that the province could stay within the rules set out in the Fiscal Management Act. The government of former Tory premier Jim Prentice was looking at repealing parts of the act due to expected deficits, a senior official at the time told The Globe.
In a recent interview with The Globe, the DBRS rating agency warned that it could rethink the province's pristine AAA-stable credit rating if provincial debt surpasses 15 per cent of GDP. Alberta is the only province to receive the agency's highest rating. DBRS estimates that total taxpayer-supported debt in Alberta was $29.3-billion at the end of the last fiscal year, or about 10 per cent of GDP.
Markets have already reacted to the impact the oil slump has had on Alberta's economy. In recent weeks, the province's bond rates have increased compared with those in British Columbia and Ontario, making borrowing more expensive for Alberta. According to data compiled by Bloomberg, the yield gap between Alberta's 2.35-per-cent bonds, with a 2025 maturity, and those from B.C. widened to seven basis points on Aug. 31. Ontario's 10-year debt is up only six basis points from B.C. According to Finance Alberta, a seven-point spread on a 10-year, $1-billion bond would increase interest costs by $7-million over a decade.
"The current volatility in global oil prices has created uncertainty in the bond market, which increases rates for jurisdictions like Alberta that have a high dependency on revenue from the energy industry," Mr. Ceci's office wrote.
Mr. Prentice had expected to spend $30-billion on new schools, roads and hospitals by the end of the decade. Ms. Notley's government has indicated it could undertake a larger spending boost more quickly to help the province's contracting economy.
"We rate Alberta AAA with a stable trend for the time being; primarily that has been based on a strong balance sheet and low debt. It hasn't been because of a well-diversified economy or being a great fiscal manager," said Travis Shaw, vice-president of public finance at DBRS. "To maintain that rating, we're going to have to see an improvement in one of those two."
Economic diversification isn't expected to happen in the short or medium term, and could elude the province even long term, according to Mr. Shaw. Ultimately, he added, the rating agency will be looking for the government to minimize deficits and slow debt growth.
"Alberta has the most favourable tax regime by far when you look at it in comparison with other provinces, and given the current environment, should this prove to be a more protracted period of low energy prices, we may need to see more on the revenue side," Mr. Shaw said.