Facing drastically falling oil revenues, the premier of the country’s wealthiest province set the stage for serious spending cuts and possible tax hikes during a televised fireside chat Thursday.
In an eight-minute speech broadcast on CTV, Alison Redford blamed a “bitumen bubble” and warned Albertans about austere times to come. The government has forecast a deficit in the current fiscal year of $3-billion.
She said the bubble — the difference between the benchmark price for oil in North America versus Alberta’s oilsands bitumen — has grown so wide it will take a $1-billion bite out of this year’s budget and $6-billion the next.
“The Alberta government will collect about $6-billion less in revenue, this year alone. To put that in context, that’s equivalent to all of our government’s spending on education this year,” Ms. Redford said.
An explosion of oil development in the U.S. Midwest and a lack of pipeline infrastructure have created a series of bottlenecks, ratcheting up oil supply and reducing the price the province can charge for its crude.
And it’s not just the drop in the Texas price that’s causing the pinch: The price Alberta actually receives for its bitumen is tanking even faster.
About a third of Alberta’s $40-billion budget comes from resource royalties. The government has already announced it would have to borrow $1.1-billion for new infrastructure projects. It’s also dipping into its rapidly draining savings fund to cover current deficits.
The premier was short on specifics about how she would manage the growing shortfalls, but admitted “some programs and services will change.”
Alberta should not be as susceptible as we are to swings in the price of oil and gas
And although Ms. Redford called raising taxes taking the “easy way out,” she also said the province needs to put itself on a more stable financial footing.
“Alberta should not be as susceptible as we are to swings in the price of oil and gas.”
The premier promised to continue to push for a Canadian Energy Strategy that would make it easier for the province to reach new markets. She also announced an upcoming Alberta Economic Summit to listen to industry experts, academics and business leaders.
Although Ms. Redford defended her government’s royalty forecasts, the opposition has long criticized the Progressive Conservatives’ bitumen projections as unrealistic.
“We called it prior to the election. I would be shocked if by 2016 Alberta’s taxes haven’t gone up and we haven’t accumulated $10- to $15-billion of debt,” said Wildrose MLA Rob Anderson.
I would be shocked if by 2016 Alberta’s taxes haven’t gone up and we haven’t accumulated $10- to $15-billion of debt
“If [Ms. Redford] had campaigned on tax increases and $10- to $15-billion of debt, she and most of her colleagues, they would not have been elected.”
In the past four months, the price of Alberta bitumen, which follows the Western Canada Select benchmark, has dropped by 35%. Last year, it averaged at US$71.80 per barrel.
It has fallen at a far faster pace than West Texas Intermediate crude since the fall, which itself is already discounted to the world oil price.
The conditions precipitating the decline in the price of Alberta’s bitumen have been long known.
“Nobody should be shocked by these numbers,” said Mount Royal University political scientist David Taras. “Any smart analyst of what was happening could have predicted these things were developing.”
Ms. Redford’s speech was intended to lay the groundwork for the new fiscal reality for Albertans, he said.
Teachers and doctors are in contract negotiations with the government. In Edmonton, the city council earlier this week moved forward with plans to construct a new arena for the Oilers — a project that is still short more than $100-million that the municipal government had hoped would come from the province. There has also been some chatter about the need for a new cancer centre.
“She has to connect Albertans into this new reality. She has to set new expectations and she has to avoid blame,” Mr. Taras said.
The government has said it will table its next budget on March 7.
It will be all the more difficult for Albertans, who were painted a much prettier picture about the province’s financial situation during the election campaign in April.
An alternate universe was created during the election
“An alternate universe was created during the election; no new taxes, a rosy, good-weather budget. And all of a sudden there’s this nightmare and we’re talking tax increases,” Mr. Taras said.
Ms. Redford’s speech evoked a long-standing tradition of similar fireside TV chats stretching back to Peter Lougheed, who took to the air often in the midst of oil crises of the ’70s.
The tactic is best remembered, however, as one of former premier Ralph Klein’s shticks, who regularly went on TV to reassure Albertans amid a span of serious budget cuts in the ’90s.
Equally hard times could be ahead.
“We’re going to have to do something about our tax structure,” said Keith Brownsey, also a political scientist at Mount Royal. “We can’t have such low income tax and a flat tax without suffering horrendous volatility and revenue and that’s just the way it is.”
However, conservatives, including the Wildrose, are equally quick to point out that the government’s spending has grown in line with burgeoning oil prices.
Earlier this week, the Fraser Institute released a report pointing out Alberta had increased spending between 2005 and 2012 by 59%. The province’s public employees were paid 7.5% more than their unionized private-sector counterparts. They were paid 10.3% more than non-unionized employees.
Far more public servants also receive a government pension.
After the speech, Wildrose opposition leader Danielle Smith said she was disappointed by Ms. Redford’s speech.
“Albertans were looking for some leadership tonight. To get an idea from the premier about what exactly she was going to do to deal with the budget crisis and get us back into a balanced budget. Instead we got a promise of a conversation to start another conversation.
“I think we’re seeing with the premier is that she doesn’t really have a plan.”
Neither, she said, was she surprised by the $6-billion figure.
“We know that the budget she put forward last year was not going to materialize the revenue projections were outlandish,” she said. “There was no possible way were going to see those numbers pan out.”