Low oil prices darken Alberta’s fiscal forecast

EDMONTON — Lower-than-expected energy revenue has Alberta on track to post another deficit this year that could reach as high as $3 billion, require spending cuts and force the government to play hardball with public sector contracts, Finance Minister Doug Horner warned Thursday.

While Horner blamed volatile world markets for the gloomy first quarter, opposition MLAs and other critics said the results are a vindication of their accusations the Redford government wildly overestimated its income projections in its pre-election budget last February.

"The bubble has officially burst on the 'Alison Wonderland' budget," Wildrose critic Kerry Towle said. "This government's inflated budget projection are now exposed for exactly what they were, a pre-election scheme to deceive Albertans and hide the true extent of their fiscal incompetence and mismanagement."

The February budget called for a relatively modest $886-million deficit, which the government promised was to be the last of five straight years of deficits before returning to a surplus in 2013-14.

The budget was based on the belief revenue would exceed $40 billion for the first time in the province's history, a target opposition critics said was unrealistic in light of the continued struggles of the global economy.

The results unveiled Thursday seem to uphold those arguments, as the province said revenue was off by $400 million in the first-quarter from April 1 to June 30. That now has the government on track toward a deficit of between $2.3 billion and $3 billion, triple what was initially estimated.

The biggest reason for the change is a massive drop in energy income. The province expected to take in almost $2.8 billion in non-renewable resource revenue during the first three months, but instead ended up with about $1.9 billion. Bitumen royalties alone were off target by about $550 million, while lease sales of Crown land were down about $215 million.

The decline was partially offset by better-than-expected revenue in other areas, including personal income tax and money from premiums, fees and licences.

Horner rejected the idea his department had been too optimistic in its revenue estimates.

He said the budget was based on a belief oil prices would average about $99 a barrel during the year, a prediction that corresponded with projections made by various banks and financial organizations.

However, prices in the first three months trended considerably lower, dropping as far as $77 in late June. Bitumen royalties were also affected by pipeline and refinery shutdowns. Horner said that inability to get product out means that Alberta gets a lower price for its oil than what is charged on the world market.

Standing in front of large coloured charts that showed the ups and downs of various fiscal updates over the past few years, Horner urged Albertans not to read too much into this year's first-quarter results.

He said the "roller-coaster" Alberta is experiencing is largely due to factors beyond its control, including economic uncertainty in the U.S. and Europe, political instability in the Middle East and massive growth in China.

"They can make it a challenge when it comes to forecasting revenues that will go into our coffers over the course of the full year," he said. "It's important to remember that much of the fiscal year is still ahead of us. This is a snapshot of a certain point in time and doesn't tell the whole story."

He noted oil prices have since returned to about $95 a barrel. For every $1 oil falls below the projected rate, Alberta loses about $220 million.

While revenue remains a challenge, Horner said the government does have control over its spending. Among the belt-tightening measures coming, the minister said he is asking provincial departments to come up with $500 million in savings this year, though it's not yet clear where those cuts will be applied.

Horner said department spending will also be capped at original budget allocations, meaning there will be no new money available for public sector contracts until the financial picture improves. He said that didn't necessarily mean a pay freeze for public sector workers, but departments will have to live within whatever funding they received at the start of the year.

"I think there should be a message in this for them (the unions) in the sense that we are going to hold the line on our spending. We are tightening our belts, so we would expect all others to do the same."

Furthermore, capital spending will also be reviewed. This week, the government announced it was cancelling a new police college for Fort Macleod, and Horner said he will as departments to look for similar projects that may not be needed right away. The new Royal Alberta Museum is safe, he said.

Shannon Phillips, a policy analyst with the Alberta Federation of Labour, said Horner's warning has produced concern that workers such as teachers and doctors — two groups currently in negotiations — will pay the price for government mismanagement of the books. She said the government wouldn't have such revenue problems if it took a fair share of royalties from oil companies, and increased taxes on wealthy corporations and individuals.

"Basing your budget on rosy oil prices is like basing your household budget on what you might win at a VLT terminal."

Alberta Teachers' Association president Carol Henderson said she expects the province to keep its promise to better fund education. She said as long as the government keeps to the budget that was already allocated, there shouldn't be an issue during negotiations.

Alberta Medical Association president Dr. Linda Slocombe said in statement it was unclear how Horner's warning might affect negotiations with doctors, who haven't had a fee increase since 2010.

While NDP critic David Eggen called on the government to fix the situation by taking in more royalties, Towle said the solution is to reduce spending. She said the financial problems will get worse as the premier tries to implement election promises, including scores of new schools and Family Care Clinics.

Any year-end deficit will be paid for out of the province's sustainability fund, which had declined to about $6.3 billion as of June 30.

Despite the government's struggles, Horner said the Alberta economy is doing well with low unemployment, and strong growth in housing starts and retail sales.

Much of 2011-12 was also gloomy and unpredictable, with the province initially projecting a $3.4-billion deficit. By year's end, the red ink was reduced to just $23 million, largely thanks to record land lease sales.

The Edmonton Journal, Thursday August 30 2012

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