Oil-rich Alberta is dialling back its budget forecasts, saying that slumping commodity prices could mean belt-tightening, bigger deficits, broken election pledges and a slower national economic recovery.
The warning Wednesday from Finance Minister Doug Horner is the latest signal that Canada's economy will not turn around as swiftly as governments across the country had hoped. British Columbia, Saskatchewan and the federal government have pulled back on revenue projections in recent weeks because of sluggish growth and low commodity prices, particularly in oil and gas.
Mr. Horner blamed the gap between the price of Alberta's oil and the North American benchmark. Alberta's typically sells at a discount, one that has widened lately. "I'm very, very concerned about where those numbers are headed," Mr. Horner said, adding the province needs new export pipelines to reach new buyers and fetch the higher price.
Any commodity downturn is felt most strongly in the west, but provincial forecasts across Canada are being revised as the U.S. economy remains sluggish and energy prices slump.
"They [the provinces] are looking at less revenue growth and having to cut expenditures to meet deficit targets," Royal Bank of Canada assistant chief economist Paul Ferley said.
Any long-term slump in energy prices would take a big bite out of the national economy, Mr. Horner warned. As the resource-rich west is stumbling, outlooks have improved slightly for Ontario and Quebec – in October, Ontario announced its deficit was smaller than expected, and Quebec's new government hopes to balance its budget for 2013-2014.
Saskatchewan is the only province forecasting a balanced budget this year. Alberta, the only debt-free province, expects to draw down its rainy day sustainability fund by about $3-billion to cover this year's ballooning deficit. Mr. Horner is expected to present Alberta's next budget in two months, and he warned on Wednesday he would have to back away from some commitments, and every ministry – even Health and Education – could be affected.
Observers warn austerity is self-limiting. In a recent report, Toronto-Dominion Bank economist Sonya Gulati said public spending restraint is a drain on economic growth in a majority of provinces – the first time that has happened since the 1990s. The big danger ahead for the economies of most provinces is the so-called "fiscal cliff" in the United States.
"What you really don't want to see is Canada falling into another recession," RBC's Mr. Ferley said. "The fiscal balances are vulnerable in central Canada and in the Atlantic provinces. Another recession would be layering on when the fiscal situation is currently strained."
Energy royalties make up a quarter of Alberta revenue, and a downturn can quickly affect services. Asked about cuts, Mr. Horner said "anything is on the table."
It presents a political problem for Premier Alison Redford, who has dealt with a series of controversies since winning the spring election. She will either have to slash the program spending promises upon which she built a centrist coalition – things like new health clinics, schools and an oil sands research fund – or run large deficits and risk further alienating her Progressive Conservative base.
The Wildrose Party, Alberta's Official Opposition, has long referred to this year's budget as "Alison in Wonderland," and said Wednesday's warning was no surprise.
"I don't know if they were living under a rock for the last year or what, but the fact of the matter was everyone knew the projections that they had were too high," finance critic Rob Anderson said. "With all that in mind, they still went ahead and promised billions and billions in new election promises."
In the oil patch, concerns about Alberta oil prices "were certainly developing well before" the province updated its forecast last month, said Don Rawson, a financial analyst with AltaCorp Capital in Calgary. Recent volatility in oil prices should, at very least, have bred caution, he said.
But the value of Canadian crude has been tremendously difficult to predict, he added. In September, light oil from Alberta actually sold at a premium to other North American crude. Now, it's at a steep discount.
"It's a tricky thing to forecast," he said, adding that he expects Alberta's oil to remain discounted for at least six months before rebounding. "This is a huge issue for all of us," he said.
Saskatchewan's energy revenue drop was offset largely by higher-than-expected personal income tax revenue. Alberta does not have the same safety net because it has no provincial sales tax and brought in a flat income tax a decade ago, one that "essentially crippled the financial position of the province," NDP Leader Brian Mason said on Wednesday. He urged Mr. Horner to look at "revenue," or tax increases. Ms. Redford has repeatedly ruled that out, and Mr. Horner was vague on Wednesday, saying only that each cabinet minister is "going to have to make some very tough choices."