Varcoe: Alberta’s finance minister will keep spending in next budget

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Just a few days after delivering last year’s budget, Alberta Finance Minister Travis Toews declared “it felt like Rome was burning” as he rolled out the new financial plan.

Twelve months later, the blaze still isn’t out from an unprecedented pandemic and recession.

Another budget is coming Thursday and more firefighting water — in the form of additional spending — will be needed, pushing Alberta’s debt levels higher.

But with the second wave of the virus still unfolding and COVID-19 vaccination timelines highly uncertain, Toews indicates the UCP government will remain in spending mode.

“It would be great if we were past the pandemic and if we were seeing significant private sector investment,” he said in an interview. “But we are still in the pandemic and we still have great strains on the economy, so there will be increased spending in this upcoming year.

“Last year, we engaged in countercyclical spending and we identified a number of strategic capital projects … to move forward with. And that environment has not yet passed.”

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In other words, don’t expect any major course correction.

Economists say that approach is prudent, given the fragile nature of the recovery and pace of vaccinations.

“It makes sense that they are looking at ways to provide some stimulus this year,” Alberta Central chief economist Charles St-Arnaud said Friday.

“Giving it a boost now helps you later on.”

Prior to the COVID-19 outbreak, the Kenney government had pledged to bring Alberta’s spending in line with other provinces in key areas and to balance the books in 2022-23.

Those plans were derailed by the virus and the deepest one-year recession on record. Toews said there’s “too much uncertainty out there” to issue a new timeline.

Over the past 11 months, as revenues have crumbled, the province has also boosted spending on health care, infrastructure and aid to businesses and individuals — totalling more than $6 billion, according to the mid-year fiscal report card issued in November.

At that time, Toews forecast the deficit for the current budget year would come in at $21.3 billion, almost three times higher than was projected last February.

As the finance minister prepares to release his new blueprint, a sudden surge in oil prices should provide a little additional firepower.

Earlier this week, benchmark oil prices jumped above US$60 a barrel, blowing past the $36.40 forecast for the budget year ending March 31.

A new report by RBC Capital Markets projects West Texas Intermediate (WTI) crude will average $61.50 a barrel this year, while the bank’s more bullish scenario has it eclipsing $70.

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Michael Tran, RBC’s managing director of global energy strategy, said chronic industry underinvestment, falling U.S. shale production and pent-up demand for travel — increasing energy consumption — are all fuelling stronger market fundamentals.

“The seeds are planted for a fairly strong cycle in the oil markets,” Tran said.

There are other indications the provincial economy is stabilizing, with the real-estate market strengthening and retail sales increasing in December from a year earlier.

Oil production is climbing and drilling activity is improving. Oilpatch capital spending is expected to rise by $3 billion, or 14 per cent, this year.

“We are seeing some bright spots in the economy,” Toews said. “Compared to what I envisioned back in April and May, it’s considerably better.”

Yet, the reality is these increases are coming off rock-bottom levels.

Meanwhile, other risks loom on the horizon. Thousands of businesses are shut down or facing restrictions because of public health orders.

Unemployment remains stubbornly high and there are 88,000 fewer jobs in Alberta than before the pandemic.

Even the recent rally in oil and natural gas prices could prove fickle as there is “some question as to the durability of these prices right now,” said Toews.

“It’s wise to take a pretty conservative view when it comes to making economic assumptions that drive revenue predictions.”

One point seems certain: Alberta faces the prospect of another immense budget deficit and more borrowing in the year ahead.

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During the November update, the province projected the deficit for the upcoming budget would hit $15.5 billion, although that figure could drop by a few billion dollars with improved oil prices, said St-Arnaud.

Debt levels are going up across Canada.

A new Conference Board of Canada report predicts federal and provincial governments are expected to add a whopping $940 billion to their aggregate net debt by 2023-24.

The crisis caused by the pandemic will “have a lasting effect on Canada’s economic performance, lowering profits and labour income,” which will impact government revenues, it warns.

Low interest rates will help, but governments need to start developing plans on how to tackle higher debt loads, said board chief economist Pedro Antunes.

Alberta is in better shape than most provinces because of its lower overall debt, but the economy has been hit harder because of the one-two punch of the pandemic and oil-price collapse, he said.

“All of these things taken together mean we’re starting to see the debt levels ramp up very, very quickly,” Antunes said.

The province’s mid-term fiscal report said taxpayer-supported debt has surged from $5 billion a decade ago to more than $97 billion by the end of this budget year.

Getting Alberta’s economy growing again — and businesses to invest — will be essential for a recovery to take root, jobs to be created and government revenues to expand.

ATB Financial chief executive Curtis Stange said the province’s economy contracted by about 7.1 per cent last year and will likely grow by about three to four per cent in 2021.

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“The recovery of the economy in 2021 will be largely dependent on demand recovering globally for energy, as well as more locally, how are we distributing vaccines,” he said.

While taxpayers, businesses and economists await the new budget, credit rating agencies are also taking note, hoping to see a longer-term financial strategy coming from the province.

“Alberta was on the mend prior to the pandemic. The debt it’s sustaining now is a real setback,” said Douglas Offerman, an analyst with Fitch Ratings.

“The budget will give us a much clearer sense of the size of that setback and what things look like going forward. But there are a lot of moving parts.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com