Download ESNA Economic Outlook 2016: Alberta*s Fiscal and Environmental

ESNA Economic Outlook 2016:
Alberta’s Fiscal and Environmental
Challenges
“It could be worse…..”
Mike Percy Ph.D.
December 3, 2016
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Challenge Facing Policymakers
 Position of Finance Minister of Alberta is likely most
challenging ministerial position in Canada
 When addressing policy shock Minister has to answer
correctly two questions and then design policy
accordingly:
 1. is the shock, in this case the oil price decline, shortterm or long-term in nature?
 2. is the resulting deficit, structural or cyclical,and if the
latter, can it be financed in the absence of incremental
tax revenue
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Key Challenge: Regime Change in
Expectations
 Capital Investment returns based on expectation of
$100 real WTI over next 20 years key driver of capital
investment in Alberta since 2010 until 2nd or 3rd
quarter 2014
 Now expectations for next 20 years based on $60 to
$80 WTI with many observers tending to lower
range.
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Why Important?
Canada
GFCF/GDP
2009
2014
21.5%
23.3%
Alberta
26.7%
35.7%
Statistics Canada, 13-016 (market prices)
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Key Driver of Growth

“Capital investment continued to have a major impact in the 2013 period accounting for 71%
of Alberta’s total GDP growth ”
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Per capita capital spending in Alberta was 3 times the national average
The energy sector accounted for 60.7% of Alberta capital spending
Capital expenditures 2015 by conventional oil and gas expected to drop by 21.% to $17.7 billion
Capital expenditures in 2015 by oil sands is expected to decline by 16.6% to $25.1 billion
Capital expenditures in 2015 by organizations providing support services to mining and oil and
gas extraction industries anticipated to drop by 69.5% $1 billion
Economic Commentary, “Capital Investment in Alberta Anticipated to Decline in 2015”, July 21, 2015, Government of Alberta
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Ongoing Capital Investment
 Capital investments in oil sands, Edmonton and
Calgary still underway providing positive impact on
economy at least thru 2016
 But will we be back to the “see thru building “
phenomena of the 1980’s?
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When Economic Modelling Becomes
Difficult
 Most models very robust in capturing cycles around
trend
 But difficulties in forecasting turning points
and significant difficulties in capturing changes in
expectations by consumers and investors
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Bottom Line
 More pessimistic regarding personal income tax, corporate
tax and royalty revenues anticipated in the October 27/15
budget and for that matter the March 26/15 budget
 One shoe has dropped – Carbon tax proposal, the second and
perhaps more important the Royalty Review due in December
 In the absence of carbon tax revenues and given spending
projected in budget and $60 WTI I would expect a structural
deficit to remain in 2019.
 larger deficits for a longer period more debt and debt
servicing costs  possible crowding out of other
expenditures
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Spending Pressures vs
Efficiency/Outcome Gains
 Alberta’s Program spending per capita in 2013-14 was
13% above national average
 Alberta’s 2014 age-gender adjusted health care
expenditures 34% above the national average
 But pressures for incremental spending in social
services, immigrant services (ESL), and local rural
governments will increase more than anticipated.
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Whither the Carbon Tax Revenues
 An incremental $3 billion anticipated 2017 but directed to
low and middle income families impacted by tax, funding
transition from coal-based electricity, and supporting
adversely affected coal-based rural communities
 Segregated or part of general revenues?
 Some portion to fund existing expenditures and reduce
deficit?
 Precursor to sales tax as Province is addressing regressivity
issue of carbon tax?
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How Could It Be Worse…?
 Province has net financial assets and fiscal capacity so
pressure on bond rating four to five years down the road
unless deficit continues to grow past 2017-18
 Net inter-provincial migration continues to be positive
although declining with Alberta leading the country 2nd
quarter of 2015
 StatsCanada survey of Capital Spending Intentions for 2015
(11/27/2015) indicates $81 billion in non-residential
construction, machinery and equipment expenditures in
Alberta – still highest $ value among provinces
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How …….
 Oil sands industry operates 24/7 and multi-billion dollar
supply chain and demand for sustaining capital
investments – significant buffer to what occurred in 1982 89 downturn.
 Interest costs remain low so debt financing of government
less expensive and high debt to personal income ratio of
Alberta residents easier to finance so long as employed.
 Infrastructure programs of provincial and federal
government will offset partially loss of private sector
investment
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