Signs of economic recovery continue, deficit steady

As reported in the government’s 2016-17 Third Quarter Fiscal Update and Economic Statement, Alberta’s economy is forecast to return to growth in 2017, following a prolonged downturn due to the oil price shock. While many Alberta families are still facing challenges due to the oil collapse, there continue to be green shoots in the economy:

• There were 199 rigs drilling in January 2017, the highest level since early 2015
• Alberta exports reached $8 billion in December 2016, 47 per cent above the low point in April 2016
• Employment has grown by 18,000 since bottoming out in July 2016

Alberta’s economy is expected to grow by 2.4 per cent in 2017, spurred by higher oil and manufacturing exports, a modest improvement in oil prices, continued public-sector infrastructure investment and continued reconstruction after the Fort McMurray wildfire.

“A full economic recovery will take time after such a long downturn, but we are starting to see encouraging signs for Alberta in the year ahead. Some challenges still remain and that’s why we are sticking to our plan of putting Albertans to work by creating good jobs and diversifying our economy. We will continue to protect the services that Albertans depend on.”

Fiscal highlights

The 2016-17 deficit is forecast to be $10.8 billion, consistent with the forecasts provided in the first and second quarter updates. Increased expense is offset by higher revenue and removal of the $700-million risk adjustment. It has been removed as the end of the fiscal year approaches.

Total revenue is now forecast at $42.9 billion, $1.5 billion higher than at budget, mainly due to improving resource revenue, federal transfers and investment income. The forecast for West Texas Intermediate (WTI) is now US$48/bbl, US$6 higher than estimated at budget.

Total expense is forecast at $53.7 billion, an increase of $2.6 billion from budget. In addition to the one-time expense being reported for the coal-transition agreements, main operating expense increases include:

• $284 million for health system pressures and drug costs
• $179 million mainly to support higher caseloads for social services related to the downturn, such as Income Support and AISH; and child intervention
• $104 million primarily for school enrolment growth to ensure there are teachers in every classroom
• $72 million increase for agriculture-related spending such as income support to producers affected by low cattle prices

Capital Plan spending is forecast at $7.3 billion, a $1.2 billion decrease from budget. Poor weather, soil and site conditions, and local permitting approvals contributed to construction delays. A number of projects in Fort McMurray, including the Northern Lights Health Centre repairs and heliport and three schools, were delayed due to the Wood Buffalo wildfire. Most of these funds are committed to specific projects and will be re-profiled to the next fiscal years. Even with the decrease this year in the Capital Plan, spending is still about $1 billion more than the average of the last five years.

Coal transition agreement

On the advice of the Office of the Auditor General, government is recording a one-time $1.1 billion expense for agreements to phase out coal-fired electricity generation by 2030. Actual payments of this amount will be made over the next 14 years and is simply being reported in the 2016-17 fiscal year. This amount will be funded through the price on carbon.

As a result of this accounting treatment, government will exceed the operating expense increase limit legislated in the Fiscal Planning and Transparency Act. Under the Act, operating expense increases are limited to one per cent of budgeted operating expense, with exceptions for collective bargaining, First Nations settlements and disaster spending.

Borrowing Authority

Government is increasing its borrowing authority by $14.5 billion to fund fiscal and capital plan needs into the next year. This also provides flexibility to borrow when rates are lower. The amount authorized is consistent with the 2017-18 targets published in Budget 2016.

2016-17 Third quarter forecast ($ millions)

Full-year forecast	Budget 2016-17	Q3 forecast	Change from Budget
Income taxes	$15,730	$14,803	$(927)
Non-renewable resource revenue	1,364	2,430	1,066
Other revenue	24,341	25,705	1,364
Total revenue	41,435	42,938	1,503
Operating expense (net of in-year savings)	44,094	44,868	774
Climate Leadership Plan operating expense	325	1,380	1,055
Disaster/emergency assistance expense	246	1,354	1,108
Other expense	6,432	6,142	(290)
Total expense	51,097	53,744	2,647
Risk adjustment	(700)	-	700
Deficit	$(10,362)	$(10,806)	$(444)

Energy and economic assumptions

	Budget 2016	Q3 forecast	Change from Budget
WTI (US$/bbl) *	42	48	6
Exchange rate (US¢/Cdn$)*	73.5	76.0	2.5
Real GDP growth (%)**	-1.4	-2.8	-1.4
Unemployment rate (%)**	8	8.1	0.1

*2016-17 fiscal year
**2016 calendar year

9-Month Actuals ($ millions)

Apr 1 to Dec 31	Budget	Actuals	Change from Budget
Revenue	$30,842	$32,600	$1,758
Expense	38,358	39,307	949
Deficit	$(7,516)	$(6,707)	$809