Albertans struggle to find much good to say about their newly minted Premier Jim Prentice as they start coping with the largest tax increase and largest deficit in their 110-year history as a Canadian province.
But they can’t say he didn’t warn them what was coming from the crippling decline in oil prices and anemic natural gas prices that have slashed an expected 17 percent from government natural resource revenues in fiscal 2015-16.
Faced with a projected drop in revenues to C$2.9 billion from C$8.8 billion in 2014-15, Alberta Finance Minister Robin Campbell unloaded a spate of tax increases for those earning more than C$50,000 a year, along with a health-care levy, taxes on alcohol, tobacco and gasoline, and higher charges for a myriad of public services.
That is accompanied by plans to raise a gigantic C$9.75 billion, Alberta’s largest financing in 15 years that will contribute to a deficit of almost C$5 billion, followed by C$3.05 billion in 2016-17 before the province expects to regain surplus territory.
“It is no longer good enough that we go from boom to bust budgets and come up with another set of patchwork solutions,” Prentice said in a statement. “Nor can we pay for day-to-day expenses by relying on unpredictable revenue.”
Could have been worse
And it could have been much worse for Albertans.
Campbell said the economists the government consulted with warned against making more drastic spending cuts and tax increases.
“They made it very clear to us that to cut too deep too quick would put the province into recession,” he said.
The new budget will give Albertans the feeling that they are “in a recession, but we’re not,” he said.
Oil and bitumen royalties make up the largest chunk of Alberta’s non-renewable resource revenue.
The government forecasts it will collect C$1.36 billion from oil sands bitumen and C$594 million from conventional crude royalties in 2015-16.
A year ago, the government targeted C$5.96 billion from its bitumen sector and C$1.85 billion from conventional crude.
The 2015-16 budget is based on an average West Texas Intermediate oil price of US$54.84 a barrel. For every US$1 oil drops, government revenues decline by C$148 million a year.
For Prentice, who insisted that hiking corporate taxes could have done serious harm to the Alberta economy, the most difficult decision was likely to dump the province’s flat tax on income, long rated as one of Alberta’s strongest selling features.
A new “health-care contribution levy” will be applied to income tax on a progressive basis for individuals with annual incomes over C$50,000.
Those earning more than C$100,000 a year will see their tax rate increase by 0.5 percent in each of the next three years to 11.5 percent by 2018, while those earning more than C$250,000 will be subject to an additional 0.5 percent for three years.
The overall tax hikes are expected to generate an extra C$2.2 billion in revenues in 2016-17, rising to C$2.7 billion in 2019-20.
Debt balloons
Debt-free earlier this century, Alberta has seen its debt balloon to C$11 billion over the last year three years and expected to reach C$17.7 billion by the end of this year and C$31 billion by 2018-19.
After that, Prentice - who is expected to call a provincial election within the next few weeks - plans to limit the amount of resource revenue that is directed into operating expenses and instead use that cash to pay down debt.
The big challenge now facing Prentice is to see whether he can succeed where his predecessors have failed to reduce Alberta’s dependency on oil and natural gas and diversify its economy.
To that end he looked beyond pessimism in a speech to the World Heavy Oil Conference in Edmonton on March 24 by insisting his province’s petroleum sector remains on a growth path that should see production rise to 4 million to 5 million bpd in 2020 from the current 2.9 million bpd.
He said many large projects in the oil sands will move to completion because they are based on long-term pricing.
“Unpromising economic conditions are an opportunity,” Prentice said. “Industry will be able to take advantage of favorable labor markets and diminished construction expenses, potentially lowering their break-even costs.”
A similar message was delivered to more than 1,000 delegates from 30 countries at the global congress, emphasizing their pursuit of a “permanent lifestyle change” that will depend on more government and regulatory support to ship more oil sands production to market via pipelines and rail.
Call for strong leadership
Mark Little, executive vice president, upstream, at oil sands giant Suncor Energy, said that “somebody has to decide what is in the best interest of our nation and make a common-interest assessment.”
“One of the challenges is that there are so many people pulling to so many different agendas that we need strong leadership and a strong vision for our country.
“I believe that pipelines need to get built. We need markets for our Canadian oil if we are to get full value for this resource,” he said.
Little said the latest industry downturn forced Suncor to act before prices recovered and the lessons were overlooked by cutting capital and operating budgets and deferring some projects, including layoffs for 1,000 of its 14,000 workers and freezing wages for 1,700 company “leaders.”
Norman Rinne, senior director of business development with Kinder Morgan, whose plans to expand its Trans Mountain pipeline system from the oil sands to the Pacific Coast face stiff opposition, said that even though the regulatory process is longer and more complex the industry “shouldn’t shy away” from pursuing growth.
He urged his peers to push for greater regulatory certainty that leads to clear decisions on industry projects.
