Alberta's fiscal update: Difficult choices ahead

Governments all over Canada are revising their budget numbers.

On Monday, the federal government updated its budget projections, and now expects an $18.4-billion deficit next year.Now it's Alberta's turn.

Many were expecting the worst, and they weren't disappointed.

The deficits will be larger than expected, especially next year. There is also no clear plan on how to improve Alberta's finances.

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Let's see the specifics.

It isn't good

Finance Minister Joe Ceci announced this year's deficit would be $6.3 billion. That's up $200 million from the October budget projection.

While only a modest increase, it masks some large changes happening behind the scenes.

In particular, revenues fella lot.

Personal income taxes are down over $760 million and natural resource revenues are down nearly $300 million.Offsetting this were some reductions in total spending, mainly lower than expected disaster-related and infrastructure spendingand lower pension liabilities.

Interestingly, the opposition Wildrose Party pointed to another deficit number, which showed a $9 billion shortfall. Both deficit numbers are correct, though they measure different things.

One measure spreads infrastructure spending over time while the other records the costs up front.

Either way, Alberta's fiscal situation isn't good.

While Albertans should be concerned, there is no need to panic. Alberta started into this difficult period with the strongest fiscal situation of any province.

Currently, the province has financial assets (investments, cash, etc.) that exceed the total amount of its debtabout $4 billion more, to be precise. This is unlike any other province, where financial assets are typically far, farsmaller than total debt.

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There's time to correct course

If any province is capable of absorbing such a massive shock, Alberta is. Simply put: the fiscal sky in Alberta is not falling, and there is time to correct our course.

Even with these revised numbers, it looks like Alberta's net-debt situation will be within four to five per centof GDP by 2018. This is better than any other provinceB.C., for example, has a net-debt position currently over 16 per centof its GDP.

The key issue is the expected path of future deficits.

Recent credit downgrades and warnings by ratings agencies warned Alberta specifically that, despite the province's strong fiscal capacity, there is no credible plan to tackle deficit.

That's a serious problem, and it's not getting any easier.

Since the last provincial budget in October 2015, oil prices have continued to fall. The government was expecting $61 oil for 2016-17, buta safer bet now is closer to $40.

This affects not only royalty revenues, but also corporate and personal income taxes.

Corporate profits are expected to shrink by over 17 per cent in 2016, and household income will likely fall by one per cent. Overall, the government estimates the economy contracted by 1.5 per centover 2015, and will fall a further 1.1 per centin 2016. This is a sharp reduction from what the government was forecasting in last October's budget.

This will all affect the government's bottom line.

The near term

When asked directly about how big next year's deficit will be, Minister Ceci said it will be "a lot; a hell of a lot."Specifically, he pinned it at "$5 billion more than we previously forecast."

Though he didn't say it out loud, that's $10.4 billion.

To put this in context, that will be about 3.25 per cent of Alberta's economy. The largest since Premier DonGetty was in office, and worse than 90 per cent of all provincial and federal government budgets in Canada since 1980.

And what's the government's plan? Unfortunately, today's forecast did not present estimates for future years. We will have to wait for an upcoming full budget for those.

In the newconferencethough, the minister firmly committed to no new taxes, and the government isn't likely to lower spending. They are committed to "bending the curve" on health care spending costs (and rightly so), but that is a longer-term process. Instead, we appear on course to simply wait for higher oil prices.

This may work out, but it's risky.

The long term

If oil prices do not rise then deficits will continue to mount. Future credit downgrades and rising borrowing costs will follow, and it will only become progressively more difficult to get the budget back on track.

The government, opposition parties, and indeed all Albertans must start to have serious conversations about the difficult choices we face. The deficit is a policy choice, and Alberta can balance its budget, gradually, anytime it wants.

The critical question is: How?

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Should revenue go up? If so, how much and through what taxes? Should spending go down? If so, in which departments and how much? Perhaps an HST should be on the table. Perhaps public sector salaries should be frozen. Perhaps the government should appoint an advisory panel to look into the options.

There are no easy answers, but serious and responsible discussions are sorely needed.

CBC Calgary's special focus on life in our city during the downturn. A look at Calgary's culture, identity and what it means to beCalgarian. Read more stories from the series atCalgary at a Crossroads.