Alberta's shock-absorber budget bets big on oil rebound

Alberta's NDP government was in a tough position with its first budget. After the election this past spring, it inherited an economy in recession, a budget that would be nearly impossible to balanceand a worsening outlook for oil.

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Having been dealt those cards, the government tabled a budget yesterday that tries to spend enough to provide a shock absorber to the provincial economy, but depends on an optimistic outlook for the price of oilto bring the budget back into balance in five years.

Oil forecast optimistic

The budget assumesoil prices willaverage $50US this fiscal year, then $61US in 2016-217, and $68 in 2017-18. While that may seem reasonable, the futures market thinks differently.

The so-called forward strip, the U.S. futures contracts on which traders and energy companies alike depend when making investment decisions, assumes the U.S. crude benchmark will be $55.43 US in December 2018, $13 US lower than the province assumes.

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"Each dollar that they're off by, in terms of the per-barrel price of oil, affects the budgetby $170 million," said Trevor Tombe, an economist at the University of Calgary.

If the market is right and Alberta is wrong, that's a $2 billion difference to the budget in 2017-18.

Morespending

Alberta's extra spending will come in two parts, a small increase in operational spending, of between $1 billion and $1.5 billion a year for the next five years, below population growth and inflation.

Operational spending is pretty restrained, according to Jack Mintz, who is with the University of Calgary's school of public policy.

"I don't think this is big [operational]spending, this isn't going to do much in terms of pumping up the economy, because the external factors will swamp it,"said Mintz. "There is capital spending, which you could argue is a good thing."

That capital program has grown by15 per cent over Alberta's last budget, to$34 billion infive years. The money will fund transit, roads, schools, hospitalsand other projects.

It is largely welcome, but what effect will it have on the economy?

In the current fiscal year, with Alberta in recession, capital spending will increase by $500 million over the previous budget. There will be a multiplier effect, meaning for that $500 million spent, economists expect it to add$750 million to the overall economy.

Alberta's GDP in 2014 was $364 billion, which makes the extra spending a relative drop in the bucket. Over 5 years, the extra spending amount to $5 billion over the March 2015 budget that was tabled, but never passed.

'It's not really a meaningful stimulative effect," said Tombe.

To be fair, Finance Minister Joe Ceci does not describe the capital spending as stimulus, butsaidthebudget laidout a responsible economic plan that will serve as a shock absorber for Alberta's short-term challenges.

Creating jobs

A key element in the budget is a job creation grant thatwill provide Alberta employers with up to $5,000 for each new hire. The goal is to support up to 27,000 new jobs each year, through to 2017.

Small business is somewhat skeptical about that program.

"We're fairly certain it won't create any new net jobs," said Justin Smith, director of policy with the Calgary Chamber of Commerce.

"We've reviewed the economic literature associated with these kinds of policies and what they tend to do is shuffle around hiring in an economy, as opposed to creating net new jobs."

According to Mintz,similar programs in the past have led to employers laying off existing employees in order to hire newones and qualify for the grant.

But Tombe thinks the program has a chance of succeeding.

"It does lower labour costs for businesses, prices matter, businesses respond to labourcosts, I would be surprised ifit didn't create one new job, but how much it does, I'm not sure."

Getting back to a balanced budget

The budget tabled Tuesday included a detailed three-year plan and committed to getting the budget back in balance two years after that, infiscal 2019-20. That promise depends on higher tax revenue, restrained spending, and, of course, a recovery in energy prices. That may not be what the market expects right now, but it is certainly possible.

However, Albertahas no control over the price of oil, so, under the current plan, itbasically comes down to luck.

Tombe, along with Mintz, and Justin Smith from the chamber of commerce all want the government to consider a provincial sales tax of some kind, an idea that is repeatedly brought up by economists, but is still considered political suicide in the province.

"I sympathize with the government," said Tombe. "They're in a tough spot, but the most efficient way to close this gap is by other sources of revenue. It's either that or spending restraint, such asprolonged restriction in wage growth for public sector workers or tough reforms in health that's not going tobe popular either.

"No economist will recommend that they do anything other than an HST, so I'm going to stick with the economist party line."