Alberta Budget 2021: Economic recovery hinges on COVID-19 vaccine, oil prices
EDMONTON -- Following years of reliance on revenue from future pipelines, the first Alberta budget of the global pandemic banks on mass vaccination to propel an economic recovery.
As Premier Jason Kenney promised, there are no new taxes. Instead, the latest budget reveals that Alberta will have to borrow its way out of a pandemic.
“It’s a plan that will see Alberta past its current crisis by focusing on what matters most,” said Finance Minister Travis Toews.
While Budget 2021 spends a record amount on health care, and sets aside dollars for COVID-19 response and recovery, Kenney’s United Conservative government continues to reel in spending elsewhere, particularly the public sector.
DEFICIT INCREASE $3B OVER LATEST PROJECTION
So long as COVID-19 continues to afflict local and global economies, Alberta is scrapping any hopes of balancing its budget.
The province’s deficit is $18.2 billion, an increase of about $3 billion over the last projection, mainly due to the cost of the COVID-19 response. Toews said a path to balance the budget would be unveiled after the pandemic is over.
Alberta’s total debt has soared to $115.8 billion, with taxpayers footing a record $2.8 billion in annual debt-servicing costs. The debt is expected to climb to $132.5 billion by 2023-24.
The rollout of the COVID-19 vaccine plays a huge role in Alberta’s prediction that the economy will rebound in the latter half of the year.
Budget 2021 projects that, while some public health measures will still be in place, expanded vaccine rollout in the late summer and early fall will bring down unemployment, restore confidence in consumer spending, decrease unemployment in trade and construction industries, and propel the housing market to a strong year. After contracting more than seven per cent last year, real GDP is expected to grow 4.8 per cent in 2021.
The document also lays out “low” and “high” scenarios, which shift projections based on several factors such as COVID-19 variants, vaccine supply and effectiveness, and oil prices.
The “low” scenario assumes vaccine distribution is delayed by one year, leading to lower oil prices and thus, less resource revenue, increasing the deficit to $20.1 billion in 2021-22 and reducing projected real GDP growth to two per cent.
A “high” scenario assumes the vaccine rollout is more effective than anticipated and accelerates economic recovery. The revised projected deficit in this scenario is $15.4 billion in 2021-22 and increasing projected real GDP growth to 7.5 per cent.
ALBERTA’S $1.25B COVID-19 CONTINGENCY FUND
The province is increasing its health budget by about $900 million to a total $21.4 billion for 2021-22 – excluding a chunk dedicated to COVID-19 contingency spending.
Health is once again the largest expense outlined in the budget, which colours itself as “protecting lives and livelihoods” while positioning the province to make a modest economic recovery.
No more dollars will be allocated the following two years as Alberta Health Services – set to receive $16 billion this year – continues with cost savings suggested in a 2020 review of the agency's operations.
Continuing care and similar community homes will see an additional $200 million this year for a total $3.5-billion budget. Mental health and addictions will also see a boost of $140 million over four years.
Physician compensation will be held below $5.4 billion throughout 2021-24.
Separate from the health budget, an additional $1.25 billion is especially dedicated to COVID-19 costs: expanding the health-care system's capacity, personal protective equipment, vaccine administration, and contact tracing and testing.
The government estimates it spent $1.5 billion on COVID-19 last year, including on critical worker benefits for AHS staff and contact tracing and testing. It spent another $530 million on PPE.
Several new facilities or upgrades are planned: a new $35-million La Crete Maternity and Community Health Centre, a $23-million contribution to the renovation of the Foothills' NICU unit in Calgary, and a $59-million commitment to moving the Rockyview General Hospital's intensive, coronary and gastrointestinal units.
PUBLIC SECTOR ‘RIGHT-SIZING’
Budget 2021 advances the government’s mission to reduce the size and cost of Alberta’s public sector.
Toews framed it: “We’re not on a path of cost cutting. We’re on a path of delivering government services most efficiently.”
Both the document and finance minister used the term “right-sizing” to describe the province’s billion-dollar reduction on compensation spending, which will impact health-care workers, teachers, and public servants.
Budget 2021 also details the loss of at least 311 full-time equivalent public sector jobs across various government departments, some of which have already happened.
Toews did not detail exactly who the changes will impact, but said the government has a goal of reducing the public service by a little less than eight per cent.
“There’s just minimal adjustments to be made, the vast majority of changes can be made through attrition at this point in time.
“Right now we are well on track with respect to the Alberta public service and our plans on right-sizing the public sector.”
Public sector compensation accounts for 54 per cent of operating expenses at $26.7 billion, including $21 billion in wages, salaries and employee benefits.
OIL PRICE PROJECTIONS AND ENERGY REVENUES
After significantly overestimating oil prices in Budget 2020, in part due to the collapse of global commodity prices early in the pandemic, Budget 2021 has much more conservative predictions.
The outlook projects the price of West Texas Intermediate (WTI) to average US$46 per barrel (/bbl) in 2021-22 and increasing to US$56/bbl by 2023-24.
On Thursday, WTI closed at US$63.48/bbl.
A year ago, economists criticized the government’s forecast that WTI would average US$58/bbl for 2020-21, an overestimation of more than 47 per cent (actual price was US$39.40/bbl).
“I would love to be surprised with much higher energy prices than what we’re predicting, but I think the prudent, responsible approach is to be conservative in our projections,” said Toews.
Non-renewable resources make up about 6.5 per cent of total revenue and have fallen almost $29 billion from previous three-year forecasts.
Like past budgets, there is an assumed reliance on revenue from pipelines down the road, namely Enbridge’s Line 3 and the TransMountain pipeline expansion expected to be completed at the end of 2021 and 2022, respectively.
Noticeably absent is the KeystoneXL pipeline expansion which was scrapped by the U.S. Biden Administration in January.
Budget 2021 accounts for only part of Alberta’s investment in the now lost project.
“We’ve been transparent in this fiscal plan in terms of Alberta’s exposure and that’s $1.3 billion on our tax scale,” said Toews.
“Right now we’re working with TC Energy to understand every option available to us.”
Bitumen royalties, along with income taxes, are expected to help total revenue grow by an average of $7.9 billion per year to $50.9 billion by 2023-24.
POST SECONDARY CUT AGAIN
The government says an additional $88 million allocated to K-12 schools in Budget 2021 is to account for the costs of a safe return to classrooms amidst COVID-19 and critical worker benefits to those in the education system. In total, $8.2 million will be spent on primary education in 2021-22 – as well as the following two years.
It credited a move last year to a funding model allocating funds according to a weighted, three-year average rather than per student – criticized by some as insufficient – as the reason schools did not see a "significant funding reduction" due to lower enrolment during the pandemic.
Post-secondary education's budget was cut again, this year by $82 million. According to a review ordered by the government to find efficiencies in its post-secondary system, Alberta spends $36,500 per student on post-secondary education, more than $5,000 more than B.C. and $15,000 more than Ontario.
"We understand that a huge deficit is not sustainable forever, but cutting post-secondary education which is a critical engine for our future growth doesn't make this problem better in the long run," Rowan Ley, chair of the Council of Alberta University Students, said. "This is a disappointment to all of us that understand the role of post-secondary in building Alberta's economic future."
The next two years, post-secondary education will see slight increases in the range of a few tens of millions. All 26 publicly funded post-secondary institutes are also set to be moved to a performance-based funding model.
Advanced education will receive $1 million more than it did in Budget 2020.