On October 27, 2015, Alberta released what Premier Notley referred to as a “shock absorber” budget. Created in the context of an anticipated recession, decreased revenues, and pressure to address an economy struggling with low oil and gas prices, the NDP government’s first budget ushers in a record deficit and almost $30 billion in new borrowing over the next five years.
For years, government spending in Alberta has been supported by natural resource revenues, allowing one of the highest rates of government spending per capita while maintaining the lowest taxation rates in the country. The fall in oil price has resulted in a loss of over $5 billion of government revenues, and triggered a significant decrease in private sector employment. Alberta is now in the unenviable position of attempting to maintain its public services with a significantly decreased revenue base.
Total expenses have risen $1.5 billion from last year to $49.9 billion, while total revenue has fallen $5.7 billion from last year to $43.8 billion. The resulting deficit is $6.1 billion. The government has set out a plan to address this deficit and balance the budget by 2019-20 by increasing expenses by 2% per year against a predicted revenue growth of 6% per year. The government has also implemented a wage freeze for cabinet, MLAs, and political staff for the remainder of the term in office, and promised to conduct a review of Alberta’s agencies, boards, and commissions to improve government efficiency and determine where reductions can be made.
Implications of the 2015 budget
According to Alberta’s budget documents, the oil and gas industry’s payments to the Province are forecast to decline $5.9 billion (67 per cent) this year, from $8.8 billion last year to $2.9 billion this year. For the oil and gas sector, which earlier this week requested a three-year lag before royalties are changed and for a fiscal take that keeps it competitive with United States shale producers, there may be relatively little comfort in this budget. Finance Minister Ceci indicated royalty increases are still on their way, along with tougher climate change regulations, once royalty and climate change reviews are completed later this year.
Key aspects of yesterday’s budget include the following:
- Alberta will run a $6.1-billion deficit in 2015-2016, the largest since 1993;
- a promise to return to balance by 2019-2020;
- the Province’s “rainy day” fund ends next year;
- Alberta will borrow $712-million in 2016, ending two decades of debt-free government operations;
- spending on infrastructure will increase by 15 per cent, to $34 billion over five years;
- the economy is expected to contract by one per cent in 2015-2016;
- $178-million will be spent over two years to support 27,000 jobs with a new grant program;
- Government debt will be capped at 15 per cent of GDP under new legislation;
- revenues have fallen by $5.7-billion, mostly due to a decline in energy royalties;
- tobacco and alcohol taxes increase; and
- a greater focus on facilitating access to capital for small and medium sized businesses.
Since their election, the NDP government has implemented several changes to provincial taxes to boost government revenue. On July 1, 2015, Alberta’s corporate tax rate increased from 10% to 12%. This change is anticipated to generate an extra $350-550M in revenues. The small business tax rate remained unchanged at 3%. No provincial sales tax - often referred to as the “third rail” of Alberta politics - were introduced in yesterday’s budget.
Personal tax increases were introduced in advance of the budget. On October 1, 2015, a five-tiered tax system was implemented that imposes higher taxes on those individuals making over $125,000 a year, to a maximum of 15% for individuals making over $300,000 a year. This change affects 7% of Albertans, and is expected to generate an additional $800M - $1 billion in government revenues.
Tax increases have been implemented for fuel, tobacco and liquor, generating a combined $695M in government revenue. There has also been a 35% increase in the amounts of traffic fines.
The Alberta government is engaging in a stimulus program and government spending to support the economy as it adjusts to declining oil price. This includes investing money in infrastructure, job creation, and economic diversification. The government is implementing this strategy through initiatives such as improving access to capital for small and medium sized businesses, in part by increasing the capital available to ATB Financial, Alberta’s Crown-owned financial institution.
The government will also contribute to Alberta Enterprise Corporation to support innovation and entrepreneurship. Further, the budget accounts for the implementation of a Job Creation Incentive Program that provides grants of up to $5,000 for each full-time position created. Finally, the government will create a new Ministry of Economic Development and Trade to streamline the private sector’s interaction with the government by focusing job creation and promotion into one ministry.