Budget 2018: a recovery built to last, was tabled in the Alberta legislature by Finance Minister Joe Ceci on Thursday, March 22, 2018. The government stated that its focus and basis of the plan was being framed around three pillars: Diversifying the Economy, Protecting Vital Public Services, and Returning to Balance. The Government’s proposals in the context of each of these pillars is analyzed and summarized in this short report.

Analysis

While the government named a return to balance as one of their key pillars, specific strategies to reach this goal are unclear. With no increases to personal or corporate taxes and no introduction of a sales tax, new sources of revenue to achieve this goal remain largely undefined amidst numerous spending promises. While corporate income is up, it is lower than it has been historically which indicates private investment is lagging.

Major themes of government investment in Budget 2018 focus on diversification and innovation. This extends upon the government’s existing legislative agenda, which includes the introduction of Bill 1: Energy Diversification Act in the current legislative session, pursuant to whichthe government acknowledged the need to diversify and actively took steps in that direction. Dentons commented on the Energy Diversification Act on March 20, 2018. Bill 2: Growth and Diversification Act was further tabled to increase training opportunities in high-tech fields and introduce new tax credits, including an interactive digital media tax credit and an enhanced Alberta Investment Tax Credit (AITC). The revisions to the AITC include $100 million in investment in small businesses each year and an additional 5 percent credit for investors investing in companies where the majority of the Board of Directors are members of an underrepresented group.

The question remains as to whether these efforts will yield sufficient results and lead to revenue in the short-term while Alberta attempts to transition to a more diversified economy. Budget 2018 made clear that the government will continue to rely heavily on resource revenues to balance in the foreseeable future.

Importance of increased market access

Budget 2018 is clear in the need to increase market access to ensure GDP growth. The economic impact of market access is significant. Additional pipeline capacity would allow producers to receive up to CA$7 billion more per year, lifting capital investment by $10 billion and production capacity by 190,000 bpd.

The government projected that the receipt of cannabis revenues will amount to $26 million with a projected increase to $99 million by 2020. The federal government will administer the excise tax based on tax room of $1 per gram or 10 percent of the producer price, whichever is greater. Provinces will take 75 percent of the tax revenue and also have the option to impose an additional provincial tax of up to 10 percent of the retail price, which Alberta plans to implement.

Implementation and product acquisition costs will result in a net loss from cannabis sales in the first two years of recreational sales, estimated to be $43 million in 2018-19 and $47 million in 2019-20. This means that municipalities should ensure adequate support from the provincial government to ensure they may implement bylaws associated with legalization of cannabis.

The Alberta government has opted for government-run online sales of cannabis, while privatizing brick-and-mortar stores. The choice to opt for privatized in-person sales will create more choice in the marketplace for consumers. From creating a budding demand for commercial real estate to an increase in corporate tax revenue paid by retailers, to job creation within the industry, the effects of private retailers will be widespread. This is not to mention the spin-off effects that will surely follow from business development and innovation surrounding the industry.

The private cannabis industry has created a wealth of expectations hinging on legalization that is set for July 2018. Most suppliers are racing to increase supply and establish themselves as one of the few companies in the cannabis space able to meet the required market demand. This has been evident through a series of mergers and acquisitions in the cannabis market. As well as the need to prepare for private sales, a number of suppliers have been working to establish business relationships with pharmaceutical distribution companies to serve the demand for medical cannabis.

Budget highlights

Budget 2018 includes investments to diversify Alberta’s economy, including:

  • $1 billion for partial upgrading over eight years beginning in 2019-20 through loan guarantees and grants;
  • $500 million in royalty credits to initiate a second phase of the Petrochemicals Diversification Program (PDP);
  • $500 million for a Petrochemical Feedstock Infrastructure Program;
  • $60 million a year for both the Alberta Investor and the Capital Investment Tax Credits; and
  • $20 million a year for a new Interactive Digital Media Tax Credit (Program to incentivize the development of interactive digital media products in Alberta).

Protecting Vital Public Services

The government committed to the following public services:

  • Protection of publicly-funded health programs and services with a $4.6 billion capital investment in health care;
  • The tuition freeze for post-secondary students will be extended for a fourth year;
  • New scholarships for technology and other emerging sectors;
  • The Early Learning and Child Care Centre program will create an additional 4,500 affordable child care spaces;
  • $328 million allocated for the Alberta Child Benefit (ACB) and the Alberta Family Employment Tax Credit (AFETC); and
  • Continuing with the implementation of $15 per hour minimum wage.

Returning to Balance

Budget 2018 promises to balance the budget by 2023-24. The 2018-19 provincial deficit is $8.8 billion. The provincial debt is projected to hit $96 billion by 2023-24. Debt servicing costs are estimated to be approximately $1.9 billion in 2018-19, which represents almost a 41 percent increase over the 2017-18 forecast. These costs are anticipated to reach approximately $2.9 billion by 2020-21.

  • Manage public sector compensation, including a salary freeze on non-union employees extended to September 2019;
  • Keep health spending growth below overall growth in population and inflation (health is currently more than 40 percent of operating expenses);
  • Phase-out grants under the Municipal Sustainability Initiative;
  • Reduce capital spending;
  • Dissolve or amalgamate government boards and commissions;
  • Transform corporate services; and
  • Tightly manage discretionary spending.

Ministerial breakdown

Below is a summary of the budgets and initiatives of major government departments.

Budget 2018 allocates $8.4 billion for 2018-19, which represents an increase of 7.7 percent continuing with the promise to fund enrolment growth. A commitment of $2.2 billion over five years on school infrastructure includes $393 million for 20 new school projects and an additional $25 million to fund the continuation of the schools modular program. The Capital Plan allocates $696 million for capital maintenance and renewal for 2018-19.

Budget 2018 allocates $6.1 billion for 2018-19, which represents a growth of 10.9 percent with base operating grants increasing 2 percent per year and an extension of the tuition freeze for the fourth year. As part of the government’s commitment to diversification, 3,000 new post-secondary technology spaces will be created over the next five years.

The Capital Plan allocates $641 million for post-secondary infrastructure, which includes $30 million to update the district energy system at the University of Alberta to increase the capacity of the campus’ electrical system. Additionally, $736 million is allocated for capital maintenance and renewal in 2018-19.

While post-secondary executive compensation has been a notable topic of discussion recently, Budget 2018 does not provide specific direction on the issue beyond the commitment to manage public sector compensation under the pillar of “Returning to Balance” mentioned above.

Budget 2018 projects WTI at $59 per barrel for 2018 with crude oil royalties expected to rise to $1 billion. Bitumen royalties are expected to fall to $1.8 billion (down from $2.4 billion). The carbon tax will increase to $50 per tonne by 2022, which aligns with the federal government mandate.

The government intends to continue its Climate Leadership Plan (CLP), committing to spending $5.3 billion over three years on its climate leadership initiatives. Notable initiatives include public transit, green research, energy efficiency programs and other projects. Funds are also allocated for household rebates, the transition from coal-generated electricity, energy efficiency projects and indigenous climate leadership.

A major development from Budget 2018 is the gradual elimination of the Municipal Sustainability Initiative (MSI) with a reduction of $152 million each year, ending in 2021-22. To assist municipalities in adjusting to the change, the government reallocated $800 million in MSI funds in 2017-18, $400 million in 2018-19 and $400 million from 2019-20.

The government committed to replace the MSI with a new infrastructure grant program with a funding formula focused on revenue sharing and has committed to working with municipalities on this issue.

The Capital Plan allocates $6.9 billion in capital investment over five years for municipalities, including $0.9 billion for light rail transit in 2018-19. The plan allocates $3 billion over the next ten years for light rail transit in Edmonton and Calgary.

Budget 2018 allocates $22.1 billion for Health in 2018-19, which represents a growth of 3 percent. Growth includes $87 million for addictions and mental health,and $4.6 billion over five years committed to capital projects.

Economic outlook

In addition to the above-noted forecasts regarding the price of oil, Budget 2018 relies on the following projections and economic assumptions:

  • Unemployment is expected to decline from its current estimate of 7.8 percent to 5.3 percent by 2021, and to 4.9 percent in 2024;
  • Real GDP growth for the next five years is anticipated to sit between 2.4-2.7 percent with exports increasing by almost 30 percent from rising oil production and an expanded manufacturing base;
  • Population growth is anticipated to be between 1.4-1.6 percent;
  • The dollar is forecast to gradually appreciate from US$0.78in 2017-18 to US$0.80 in 2019-20; and
  • As the Government of Canada’s monetary policy contracts, interest rates are forecasted to continue to rise which could pose a threat to Alberta households that are heavily indebted as the cost of borrowing becomes more expensive.

Dentons has not attempted to verify the accuracy or completeness of the government’s assumptions.

Deputy Minister changes

A day prior to the budget, there was a shuffle of Deputy Ministers within the Alberta Government. Below is an updated list effective March 21, 2018.

Ministry

Deputy Minister

Executive Branch

Marcia Nelson, Deputy Minister, Executive Council

Ray Gilmour, Associate Deputy Minister, Executive Council and Deputy Minister of Operations

Beverly Yee, Deputy Minister, Intergovernmental Relations

Advanced Education

Rod Skura

Agriculture and Forestry

Andre Corbould

Children’s Services

Darlene Bouwsema

Community and Social Services

Shannon Marchand

Culture and Tourism

Meryl Whittaker

Economic Development and Trade

Jason Krips

Education

Dr. Curtis Clarke

Energy

Collen Volk

Environment and Parks

Eric Denhoff (also the Deputy Minister responsible for the Climate Change Office)

Health

Milton Sussman

Indigenous Relations

Donavon Young

Infrastructure

Shannon Flint

Justice and Solicitor General

Philip Bryden

Labour

Jeff Parr

Municipal Affairs

Brad Pickering

Seniors and Housing

Kim Armstrong

Service Alberta

David Morhart

Status of Women

Susan Taylor

Transportation

Barry Day

Treasury Board and Finance

Lorna Rosen