Last spring, oil prices fell so far that they actually went negative. Such a thing had never happened before. Supply overwhelmed a pandemic collapse in demand and the oil market, briefly, turned upside down: sellers were paying buyers. When trading ended on April 20, the price of a barrel of oil was minus US$37.63.
The episode of negative prices was short, but the following months of low oil prices were not. The oil price crash of 2020 cut billions out of Canada’s economy, and the hardest hit province was, of course, Alberta.
Alberta’s 2020-21 books were last estimated with a deficit of $21.3-billion on revenue of $41.4-billion. The province has ridden the oil price whipsaw for decades, but this is a new nadir.
The past year’s biggest revenue line? Not income taxes or oil royalties, but $11.3-billion in transfers from Ottawa.
However, the price of oil has shot higher since the fall. And that has thrown a temporary fiscal lifeline to Premier Jason Kenney’s United Conservative Party government, which releases its 2021-22 budget on Thursday.
In the long run, Alberta won’t be able to avoid a difficult fiscal reckoning. It won’t be able to count on oil windfalls forever. But one more hit of higher oil prices could at least give the province the fiscal breathing room to transition to that future.
In a budget update three months ago, the outlook was grim. Alberta pencilled in 2021-22 revenue of $42.7-billion and a deficit of $15.5-billion. The predicted oil price was US$45. But the West Texas Intermediate benchmark last week cracked US$60, and the continental price gap has narrowed, with the Western Canadian Select benchmark pushing through US$50 this week.
These higher prices could reduce Alberta’s forecast deficit by about $6-billion.
But that good news, even if it holds for months or years, would still leave Alberta permanently and deeply in the red. The Business Council of Alberta, a group of CEOs formed in 2019, made the latest case to take a hard look at those shaky fiscal foundations in a to-the-point report last week. “Alberta, we have a problem,” the council declared. “For years, we have undertaxed and overspent.”
Their prescription is a provincial sales tax. Premier Jason Kenney, as always, rejected all such talk, saying last week that it is “the worst possible time” for such a move. As far as timing goes, he is correct. A recession is no time to raise taxes.
But what about 2022? Or 2023? When Mr. Kenney formed government in 2019, he appointed a panel to assess putting Alberta’s fiscal house in order – but they were only allowed to look at cutting spending, not raising revenue. The result is that Alberta will spend less on education and health care in 2023 than it did in 2019.
But spending is only one side of the ledger. In a grudging concession to reality, the province’s Finance Minister last summer acknowledged that “it will be important” to talk about revenue and taxes. Eventually. Maybe when someone else is in power.
For the past 60 years, Alberta has been the only province without a sales tax. Some Albertans revel in it; the Business Council called that an “outdated mythology.” It floated a harmonized sales tax of 8 per cent, to generate about $8-billion a year. It also called for a consumer carbon tax – as the previous NDP government brought in – rather than leaving Ottawa to fill the gap. Mr. Kenney’s first move as premier was to axe the NDP tax, instantly gutting $1.4-billion a year from the treasury.
Even if Alberta adopts a sales tax, it will remain a low-tax province. And if Alberta doesn’t find new revenue sources, then this long-time high spender on programs such as health and education will have to cut all the way to becoming a below-average spender.
The projected deficit in Thursday’s budget will be big, though likely less big than feared, thanks to a bump in oil prices. But Alberta can’t count on these windfalls forever.
In 2015, the late Jim Prentice bluntly said that to fix the province’s fiscal problems, Albertans had to “look in the mirror.” That was not well received; Mr. Prentice lasted eight months as premier. But he spoke the truth. A future of lower oil prices means the province has to make hard choices. Treating low taxes as sacrosanct, but all spending as potentially expendable, is not the only choice.
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